Proposed Exemptions; Allfirst Bank, et al.

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10706 et al.]

Proposed Exemptions; Allfirst Bank, et al.

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the

Department of Labor (the Department) of proposed exemptions from

certain of the prohibited transaction restrictions of the Employee

Retirement Income Security Act of 1974 (the Act) and/or the Internal

Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

Unless otherwise stated in the Notice of Proposed Exemption, all

interested persons are invited to submit written comments, and with

respect to exemptions involving the fiduciary prohibitions of section

406(b) of the Act, requests for hearing within 45 days from the date of

publication of this Federal Register Notice. Comments and requests for

a hearing should state: (1) The name, address, and telephone number of

the person making the comment or request; and (2) the nature of the

person's interest in the exemption and the manner in which the person

would be adversely affected by the exemption. A request for a hearing

must also state the issues to be addressed and include a general

description of the evidence to be presented at the hearing.

ADDRESSES: All written comments and request for a hearing (at least

three copies) should be sent to the Pension and Welfare Benefits

Administration, Office of Exemption Determinations, Room N-5649, U.S.

Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.

20210. Attention: Application No. stated in each Notice of Proposed

Exemption. The applications for exemption and the comments received

will be available for public inspection in the Public Documents Room of

Pension and Welfare Benefits Administration, U.S. Department of Labor,

Room N-5507, 200 Constitution Avenue, N.W., Washington, D.C. 20210.

Notice to Interested Persons

Notice of the proposed exemptions will be provided to all

interested persons in the manner agreed upon by the applicant and the

Department within 15 days of the date of publication in the Federal

Register. Such notice shall include a copy of the notice of proposed

exemption as published in the Federal Register and shall inform

interested persons of their right to comment and to request a hearing

(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in

applications filed pursuant to section 408(a) of the Act and/or section

4975(c)(2) of the Code, and in accordance with procedures set forth in

29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).

Effective December 31, 1978, section 102 of Reorganization Plan No. 4

of 1978 (43 FR 47713, October 17, 1978) transferred the authority of

the Secretary of the Treasury to issue exemptions of the type requested

to the Secretary of Labor. Therefore, these notices of proposed

exemption are issued solely by the Department.

The applications contain representations with regard to the

proposed exemptions which are summarized below. Interested persons are

referred to the applications on file with the Department for a complete

statement of the facts and representations.

Allfirst Bank, Located in Baltimore, Maryland

[Application No. D-10706]

Proposed Exemption

The Department is considering granting an exemption under the

authority of section 408(a) of the Act and section 4975(c)(2) of the

Code and in accordance with the procedures set forth in 29 CFR Part

2570, Subpart B (55 FR 32836, August 10, 1990).

Section I--Proposed Exemption for Receipt of Fees

If the exemption is granted, the restrictions of section 406(a) and

406(b) of the Act and the sanctions resulting from the application of

section 4975 of the Code, by reason of section 4975(c)(1)(A) through

(F) of the Code, shall not apply as of November 13, 1998, to the

proposed receipt of fees by Allfirst from the ARK Funds, an open-end

investment company registered under the Investment Company Act of 1940

(the 1940 Act), for acting as an investment adviser for such Funds, as

well as for providing other services to the ARK Funds which are

``Secondary Services'' as defined in Section III(i), in connection with

the investment by plans for which Allfirst serves as a fiduciary (the

Client Plans) in shares of the ARK Funds, provided that the following

conditions and the general conditions of Section II are met:

(a) Each Client Plan satisfies either (but not both) of the

following:

(1) The Client Plan receives a cash credit of such Plan's

proportionate share of all fees charged to the Funds by Allfirst for

investment advisory services, including any investment advisory fees

paid by Allfirst to third party sub-advisers, no later than the same

day as the receipt of such fees by Allfirst. The crediting of all such

fees to the Client Plans by Allfirst is audited by an independent

accounting firm on at least an annual basis to verify the proper

crediting of the fees to each Plan.

(2) The Client Plan does not pay any Plan-level investment

management fees, investment advisory fees, or similar fees to Allfirst

with respect to any of the assets of such Plan which are invested in

shares of any of the ARK Funds. This

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condition does not preclude the payment of investment advisory or

similar fees by the ARK Funds to Allfirst under the terms of an

investment management agreement adopted in accordance with section 15

of the 1940 Act, nor does it preclude the payment of fees for Secondary

Services to Allfirst pursuant to a duly adopted agreement between

Allfirst and the ARK Funds.

(b) The price paid or received by a Client Plan for shares in a

Fund is the net asset value per share at the time of the transaction,

as defined in Section III(f), and is the same price which would have

been paid or received for the shares by any other investor at that

time.

(c) Allfirst, including any officer or director of Allfirst, does

not purchase or sell shares of the ARK Funds from or to any Client

Plan.

(d) No sales commissions are paid by the Client Plans in connection

with the purchase or sale of shares of the ARK Funds, and no redemption

fees are paid in connection with the sale of shares by the Client Plans

to the ARK Funds.

(e) For each Client Plan, the combined total of all fees received

by Allfirst for the provision of services to a Client Plan, and in

connection with the provision of services to the ARK Funds in which the

Client Plan may invest, are not in excess of ``reasonable

compensation'' within the meaning of section 408(b)(2) of the Act.

(f) Allfirst does not receive any fees payable pursuant to Rule

12b-1 under the 1940 Act in connection with the transactions.

(g) The Client Plans are not employee benefit plans sponsored or

maintained by Allfirst.

(h) The Second Fiduciary receives, in advance of any initial

investment by the Client Plan in a Fund, full and detailed written

disclosure of information concerning the ARK Funds, including but not

limited to:

(1) A current prospectus for each Fund in which a Client Plan is

considering investing;

(2) A statement describing the fees for investment advisory or

similar services, any secondary services as defined in Section III(i),

and all other fees to be charged to or paid by the Client Plan and by

the ARK Funds, including the nature and extent of any differential

between the rates of such fees;

(3) The reasons why Allfirst may consider such investment to be

appropriate for the Client Plan;

(4) A statement describing whether there are any limitations

applicable to Allfirst with respect to which assets of a Client Plan

may be invested in the ARK Funds, and if so, the nature of such

limitations; and

(5) Upon request of the Second Fiduciary, a copy of the proposed

exemption and/or a copy of the final exemption, if granted, once such

documents are published in the Federal Register.

(i) After consideration of the information described above in

paragraph (h), the Second Fiduciary authorizes in writing the

investment of assets of the Client Plan in each particular Fund and the

fees to be paid by such ARK Funds to Allfirst.

(j) All authorizations made by a Second Fiduciary regarding

investments in a Fund and the fees paid to Allfirst are subject to an

annual reauthorization wherein any such prior authorization referred to

in paragraph (i) shall be terminable at will by the Client Plan,

without penalty to the Client Plan, upon receipt by Allfirst of written

notice of termination. A form expressly providing an election to

terminate the authorization described in paragraph (i) above (the

Termination Form) with instructions on the use of the form must be

supplied to the Second Fiduciary no less than annually--provided that

the Termination Form need not be supplied to the Second Fiduciary

pursuant to this paragraph sooner than six months after such

Termination Form is supplied pursuant to paragraph (l) below, except to

the extent required by such paragraph in order to disclose an

additional service or fee increase. The instructions for the

Termination Form must include the following information:

(1) The authorization is terminable at will by the Client Plan,

without penalty to the Client Plan, upon receipt by Allfirst of written

notice from the Second Fiduciary; and

(2) Failure to return the Termination Form will result in continued

authorization of Allfirst to engage in the transactions described in

paragraph (i) on behalf of the Client Plan.

(k) For each Client Plan using the fee structure described in

paragraph (a)(1) above with respect to investments in a particular

Fund, the Second Fiduciary of the Client Plan receives full written

disclosure in a Fund prospectus or otherwise of any increases in the

rates of fees charged by Allfirst to the ARK Funds for investment

advisory services.

(l)(1) For each Client Plan using the fee structure described in

paragraph (a)(2) above with respect to investments in a particular

Fund, an increase in the rate of fees paid by the Fund to Allfirst

regarding any investment management services, investment advisory

services, or similar services that Allfirst provides to the Fund over

an existing rate for such services that had been authorized by a Second

Fiduciary in accordance with paragraph (i) above; or

(2) For any Client Plan under this proposed exemption, an addition

of a Secondary Service (as defined in Section III(i) below) provided by

Allfirst to the Fund for which a fee is charged, or an increase in the

rate of any fee paid by the ARK Funds to Allfirst for any Secondary

Service that results either from an increase in the rate of such fee or

from the decrease in the number of kind of services performed by

Allfirst for such fee over an existing rate for such Secondary Service

which had been authorized by the Second Fiduciary of a Client Plan in

accordance with paragraph (i) above;

Allfirst will, at least 30 days in advance of the implementation of

such additional service for which a fee is charged or fee increase,

provide a written notice (which may take the form of a proxy statement,

letter, or similar communication that is separate from the prospectus

of the Fund and that explains the nature and amount of the additional

service for which a fee is charged or of the increase in fees) to the

Second Fiduciary of the Client Plan. Such notice shall be accompanied

by a Termination Form with instructions as described in paragraph (i)

above.

(m) On an annual basis, Allfirst provides the Second Fiduciary of a

Client Plan investing in the ARK Funds with:

(1) A copy of the current prospectus for the ARK Funds in which the

Client Plan invests and, upon such fiduciary's request, a copy of the

Statement of Additional Information for such ARK Funds which contains a

description of all fees paid by the ARK Funds to Allfirst;

(2) A copy of the annual financial disclosure report prepared by

Allfirst which includes information about the Fund portfolios as well

as audit findings of an independent auditor within 60 days of the

preparation of the report; and

(3) Oral or written responses to inquiries of the Second Fiduciary

as they arise.

(n) With respect to each of the ARK Funds in which a Client Plan

invests, in the event such Fund places brokerage transactions with

Allfirst, Allfirst will provide the Second Fiduciary of such Plan at

least annually with a statement specifying:

(1) The total, expressed in dollars, of brokerage commissions of

each Fund that are paid to Allfirst by such Fund;

(2) The total, expressed in dollars, of brokerage commissions of

each Fund

[[Page 57131]]

that are paid by such Fund to brokerage firms unrelated to Allfirst;

(3) The average brokerage commissions per share, expressed as cents

per share, paid to Allfirst by each Fund; and

(4) The average brokerage commissions per share, expressed as cents

per share, paid by each Fund to brokerage firms unrelated to Allfirst.

(o) All dealings between the Client Plans and the ARK Funds are on

a basis no less favorable to the Plans than dealings with other

shareholders of the ARK Funds.

Section II--General Conditions

(a) Allfirst maintains for a period of six years the records

necessary to enable the persons described below in paragraph (b) to

determine whether the conditions of this exemption have been met,

except that (1) a prohibited transaction will not be considered to have

occurred if, due to circumstances beyond the control of Allfirst, the

records are lost or destroyed prior to the end of the six-year period,

and (2) no party in interest other than Allfirst shall be subject to

the civil penalty that may be assessed under section 502(i) of the Act

or to the taxes imposed by section 4975(a) and (b) of the Code if the

records are not maintained or are not available for examination as

required by paragraph (b) below.

(b)(1) Except as provided below in paragraph (b)(2) and

notwithstanding any provisions of section 504(a)(2) of the Act, the

records referred to in paragraph (a) are unconditionally available at

their customary location for examination during normal business hours

by--

(i) Any duly authorized employee or representative of the

Department or the Internal Revenue Service,

(ii) Any fiduciary of the Client Plans who has authority to acquire

or dispose of shares of the ARK Funds owned by the Client Plans, or any

duly authorized employee or representative of such fiduciary, and

(iii) Any participant or beneficiary of the Client Plans or duly

authorized employee or representative of such participant or

beneficiary;

(2) None of the persons described in paragraph (b)(1)(ii) and (iii)

shall be authorized to examine trade secrets of Allfirst, or commercial

or financial information which is privileged or confidential.

Section III--Definitions

For purposes of this proposed exemption:

(a) The term ``Allfirst'' means Allfirst Bank, and any affiliate

thereof as defined below in paragraph (c)(1) of this section, effective

as of June 28, 1999, the date the First National Bank of Maryland

(First Maryland) changed its name to Allfirst Bank.

(b) The term ``First Maryland'' refers to First National Bank of

Maryland, and any affiliate thereof as defined below in paragraph

(c)(1) of this section, prior to June 28, 1999.

(c) An ``affiliate'' of a person includes:

(1) Any person directly or indirectly through one or more

intermediaries, controlling, controlled by, or under common control

with the person;

(2) Any officer, director, employee, relative, or partner in any

such person; and

(3) Any corporation or partnership of which such person is an

officer, director, partner, or employee.

(d) The term ``control'' means the power to exercise a controlling

influence over the management or policies of a person other than an

individual.

(e) The term ``Fund'' or ``ARK Funds'' shall include the ARK Funds,

Inc. or any other diversified open-end investment company or companies

registered under the 1940 Act for which Allfirst serves as an

investment adviser and may also serve as a custodian, dividend

disbursing agent, shareholder servicing agent, transfer agent, Fund

accountant, or provide some other ``Secondary Service'' (as defined

below in paragraph (i) of this Section) which has been approved by such

ARK Funds.

(f) The term ``net asset value'' means the amount for purposes of

pricing all purchases and sales calculated by dividing the value of all

securities, determined by a method as set forth in the Fund's

prospectus and Statement of Additional Information, and other assets

belonging to the Fund or portfolio of the Fund, less the liabilities

charged to each such portfolio or Fund, by the number of outstanding

shares.

(g) The term ``relative'' means a ``relative'' as that term is

defined in section 3(15) of the Act (or a ``member of the family'' as

that term is defined in section 4975(e)(6) of the Code), or a brother,

a sister, or a spouse of a brother or a sister.

(h) The term ``Second Fiduciary'' means a fiduciary of a Client

Plan who is independent of and unrelated to Allfirst. For purposes of

this exemption, the Second Fiduciary will not be deemed to be

independent of and unrelated to Allfirst if:

(1) Such fiduciary directly or indirectly controls, is controlled

by, or is under common control with Allfirst;

(2) Such fiduciary, or any officer, director, partner, employee, or

relative of the fiduciary is an officer, director, partner or employee

of Allfirst (or is a relative of such persons);

(3) Such fiduciary directly or indirectly receives any compensation

or other consideration for his or her own personal account in

connection with any transaction described in this proposed exemption.

If an officer, director, partner or employee of Allfirst (or

relative of such persons), is a director of such Second Fiduciary, and

if he or she abstains from participation in (i) the choice of the

Client Plan's investment adviser, (ii) the approval of any such

purchase or sale between the Client Plan and the ARK Funds, and (iii)

the approval of any change in fees charged to or paid by the Client

Plan in connection with any of the transactions described in Section I

above, then paragraph (h)(2) of this section shall not apply.

(i) The term ``Secondary Service'' means a service other than an

investment management, investment advisory, or similar service, which

is provided by Allfirst to the ARK Funds, including but not limited to

custodial, accounting, brokerage, administrative, or any other service.

(j) The term ``Termination Form'' means the form supplied to the

Second Fiduciary which expressly provides an election to the Second

Fiduciary to terminate on behalf of a Client Plan the authorization

described in paragraph (i) of Section I. Such Termination Form may be

used at will by the Second Fiduciary to terminate an authorization

without penalty to the Client Plan and to notify Allfirst in writing to

effect a termination by selling the shares of the ARK Funds held by the

Client Plan requesting such termination within one business day

following receipt by Allfirst of the form; provided that if, due to

circumstances beyond the control of Allfirst, the sale cannot be

executed within one business day, Allfirst shall have one additional

business day to complete such sale.

EFFECTIVE DATE: The proposed exemption, if granted, will be effective

as of November 13, 1998, the date that Dauphin Deposit Bank and Trust

Company ceased to exist as a separate bank as a result of its

acquisition by First Maryland.

Summary of Facts and Representations

1. Allfirst is currently a subsidiary of First Maryland Bancorp, a

Maryland corporation and bank holding company registered under the Bank

Holding Company Act of 1956. Prior to June 28, 1999, Allfirst was doing

business under the name ``First National Bank of Maryland'' (i.e.,

First Maryland). The

[[Page 57132]]

applicant represents that First Maryland changed its name to ``Allfirst

Bank'' effective June 28, 1999. The applicant states that as of

September 21, 1999, there have been no further name changes. Thus, all

representations made by Allfirst are meant to apply to First Maryland

for the period from November 13, 1998, the effective date of this

proposed exemption, until June 28, 1999.

First Maryland Bancorp serves, through its banking, trust company

and investment management affiliates, as trustee, investment manager

and/or custodian to employee benefit plans. As of December 31, 1997,

these affiliates collectively provided trust services to approximately

800 employee benefit trusts, and had total assets under management of

approximately $16 billion. As of that date, First Maryland Bancorp had

consolidated total assets of $17.8 billion.

Prior to November 13, 1998, First Maryland Bancorp wholly-owned the

following banks and trust companies: (i) The York Bank & Trust Company

(a Pennsylvania-chartered bank, referred to hereafter as York Bank);

(ii) First Omni Bank, N.A. (a national banking association); (iii)

First National Bank of Maryland (a national banking association); (iv)

Dauphin Deposit Bank & Trust Company (a Pennsylvania-chartered bank,

acquired July 8, 1997, referred to hereafter as ``Dauphin''); and (v)

FMB Trust Company, N.A. (a non-depository trust company wholly-owned by

First Maryland).

Effective November 13, 1998, Dauphin and York Bank were merged into

First Maryland. Following this merger, the trust and investment

advisory business formerly conducted by Dauphin was conducted by First

Maryland and its trust and investment advisory subsidiaries.

First Maryland (i.e., Allfirst, as of June 28, 1999) also owns

First Maryland Brokerage Corp., a brokerage firm, and Allied Investment

Advisors, Inc. (Allied), a registered investment adviser that serves as

investment adviser to the ARK Funds. As of June 30, 1998, Allied had

assets under management of approximately $11.1 billion.

First Maryland Bancorp is controlled by Allied Irish Banks, p.l.c.,

which owns 100% of First Maryland Bancorp's outstanding common stock.

2. In 1996, Dauphin obtained a prohibited transaction exemption

from the Department (see Prohibited Transaction Exemption (PTE) 96-45

(61 FR 28244, June 4, 1996). Section I of PTE 96-45 permits the in-kind

transfer of assets of plans for which Dauphin acted as a fiduciary (the

Client Plans), other than plans established and maintained by Dauphin

(Bank Plans), that were held in certain collective investment funds

(CIFs) maintained by Dauphin, in exchange for shares of the Marketvest

Funds, open-end investment companies registered under the 1940 Act, in

situations where Dauphin acted as investment advisor for such Funds, as

well as for providing certain ``secondary services'' to such Funds (as

defined therein), in connection with the termination of such CIFs.

Section II of PTE 96-45 permits the receipt of fees by Dauphin from the

Marketvest Funds, or any other diversified open-end investment company

registered under the 1940 Act for which Dauphin serves as an investment

adviser, for acting as an investment adviser for such Funds as well as

for providing other services to the Funds which are ``secondary

services'' (as defined therein), in connection with the investment by

the Client Plans in shares of such Funds.

In July 1997, Dauphin became a subsidiary of First Maryland, and in

March 1998, the Marketvest Funds were merged into First Maryland's

family of mutual funds. Dauphin ceased to exist as a separate bank as

of November 13, 1998. Therefore, First Maryland requested a new

exemption to enable it to obtain exemptive relief similar to the relief

granted by the Department to Dauphin in Section II of PTE 96-45 for the

receipt of fees by Dauphin from the Marketvest Funds. With respect to

the relief provided to Dauphin in Section I of PTE 96-45, it should be

noted that the Department granted a class exemption in August 1997 for

collective investment fund conversion transactions (see PTE 97-41, 62

FR 42830, August 8, 1997). Thus, the relief provided to Dauphin in PTE

96-45, Section I, for in-kind transfers of CIF assets to Funds, would

be available under PTE 97-41 to First Maryland as of November 13, 1998,

and is available to Allfirst as of June 28, 1999, if the conditions of

that class exemption are met.

However, First Maryland (i.e., Allfirst), like Dauphin and as the

acquirer of Dauphin's business, serves a number of employee benefit

plan clients in the capacity of trustee, investment manager, and/or

custodian. The assets of some of these plans are investment in the ARK

Funds, a series of mutual fund portfolios advised by an affiliate of

Allfirst, as discussed further below. As a result, this proposed

exemption concerns the relief needed by First Maryland, as of November

13, 1998, and Allfirst, as of June 28, 1999, for the receipt of fees by

such entities from the ARK Funds for investment advisory and other

services to such Funds.

3. As noted above, Allfirst acts as a trustee, directed trustee,

investment manager, and/or custodian for a number of plans (referred to

herein as ``the Client Plans''). The Client Plans may include various

pension, profit sharing, and stock bonus plans, as well as voluntary

employees' beneficiary associations, supplemental unemployment benefit

plans, simplified employee benefit plans, retirement plans for self-

employed individuals (i.e. Keogh Plans) and individual retirement

accounts (IRAs). Some of the Client Plans may be participant-directed

individual account plans.

As custodian of a Client Plan, Allfirst is responsible for

maintaining custody over all or a portion of the Client Plan's assets,

for providing trust accounting and valuation services, for asset and

transaction reporting, and for execution and settlement of directed

transactions. Where Allfirst serves as trustee or directed trustee, it

is responsible for ownership of the assets of the Client Plan, and may

provide additional trust services such as benefit payments, loan

processing, and participant accounting. Where Allfirst is also acting

as the investment manager, Allfirst has investment discretion over the

Client Plan's assets and is responsible for implementing the Plan's

funding policies and investment objectives, executing transactions, and

periodic performance measurements.

The Client Plans pay fees in accordance with fee schedules

negotiated with Allfirst. Fees vary from fixed amounts to asset-based

amounts, depending on the level of services provided, and may include

further charges for additional trust services such as processing

benefit payments.

The specific Client Plans of Allfirst to which this proposed

exemption, if granted, would apply are those whose assets were invested

in the ARK Funds as of November 13, 1998, those whose assets have been

invested in such Funds since that date, and those whose assets will be

invested in such Funds in the future. However, Allfirst does not seek

relief for investments in the Funds by any employee benefit plans

established and maintained by Allfirst for its own employees (Allfirst

Plans).1

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\1\ Allfirst represents that it will comply with the

requirements of Prohibited Transaction Exemption (PTE) 77-3, 42 FR

18734 (April 8, 1977), with respect to any investments in the Funds

made by the Allfirst Plans. PTE 77-3 permits the acquisition or sale

of shares of a registered, open-end investment company by an

employee benefit plan covering only employees of such investment

company, employees of the investment adviser or principal

underwriter for such investment company, or employees of any

affiliated person (as defined therein) of such investment adviser or

principal underwriter, provided certain conditions are met. The

Department is expressing no opinion in this proposed exemption

regarding whether any of the transactions with the Funds by the

Allfirst Plans would be covered by PTE 77-3.

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[[Page 57133]]

4. The ARK Funds are registered as an open-end investment company

with the SEC under the 1940 Act. The ARK Funds consist of a series of

investment portfolios (each a ``Fund'') representing distinct

investment vehicles. Each ARK Fund will have its own prospectus or a

joint prospectus with one or more other ARK Fund(s). The shares of each

ARK Fund will represent a proportionate interest in the assets of that

Fund.

The overall management of the ARK Funds, including the negotiation

of investment advisory contracts, will rest with each Fund's Board of

Directors, more than a majority of whose members will be independent of

Allfirst. The Board of Directors will be elected by the shareholders of

the Funds. Allied, which is a wholly-owned subsidiary of Allfirst,

serves as the investment adviser to each ARK Fund and will receive

investment advisory fees from each Fund that will vary between 0.20%

and 1.00% of the Fund's average net assets on an annual basis,

depending on the particular Fund. However, these fees will be subject

to voluntary waivers by Allfirst and initially will be no more than

0.87% of the Fund's average net assets. FMB Trust Company, another

First Maryland subsidiary, serves as custodian of the ARK Funds, for

which it receives a custodial services fee and also provides sub-

administration services for a fee.

The other service-providers to the Funds will be independent of and

unaffiliated with Allfirst. Such service-providers currently will

include: (i) The Fund Administrator, SEI Investments Mutual Fund

Services; (ii) the Fund Distributor, SEI Investments Distribution Co.;

and (iii) the Transfer Agent, SEI Investments Management Corporation.

The ARK Funds also may pay shareholder servicing fees of up to 0.15% on

certain classes of shares.

The Funds will be able to charge a distribution fee of 0.25% of a

Fund's average net assets, pursuant to Rule 12b-1 under the 1940 Act,

for certain classes of shares. However, Allfirst represents that such

12b-1 fees will not be charged to any class of shares invested in by

the Client Plans. Therefore, Allfirst will not receive any fees payable

pursuant to Rule 12b-1 under the 1940 Act in connection with the

transactions covered by this proposed exemption.

5. Allfirst is making the ARK Funds available to the Client Plans

because it believes that there are material advantages to the Client

Plans from the use of the ARK Funds, and Allfirst's customers are

interested in having mutual funds available as investment vehicles for

their employee benefit plan trust accounts. The ARK Funds are valued on

a daily basis, which permits: (i) Immediate investment of Plan

contributions in varied types of investments; (ii) greater flexibility

in transferring assets from one type of investment to another; and

(iii) daily redemption of investments for purposes of making

distributions. In addition, information concerning the investment

performance of the ARK Funds is available each day in newspapers of

general circulation, which allow Client Plan sponsors and participants

to monitor the performance of their investments on a daily basis.

Furthermore, shares of the ARK Funds can be given to Client Plan

participants in plan distributions, thus avoiding the expense and delay

of liquidating plan investments and facilitating roll-overs into IRAs.

At the present time, Allfirst expects that the Client Plans will be

able to continue making direct purchases of ARK Fund shares for cash on

an ongoing basis.

Allfirst states that the price that will be paid or received by a

Client Plan for shares in a Fund will be the net asset value per share

at the time of the transaction, as defined in Section III(f), and will

be the same price which will be paid or received for the shares by any

other investor at that time. In addition, Allfirst states that no sales

commissions or redemption fees will be charged in connection with the

purchase or sale of Fund shares by the Client Plans.

6. Prior to investing any Client Plan's assets in an ARK Fund,

Allfirst will obtain the approval of a Second Fiduciary acting for the

Client Plan. The Second Fiduciary generally will be the Client Plan's

named fiduciary, trustee (if other than Allfirst), or the sponsoring

employer. Allfirst will provide the Second Fiduciary with a current

prospectus for the Fund and a written statement giving full disclosure

of the fee structure under which either Allfirst's investment advisory

and other fees will be credited back to the Client Plan or the Plan-

level investment management fees will be waived. The disclosure

statement and the letter that precedes the disclosure statement will

describe why Allfirst believes the investment of a Client Plan's assets

in the ARK Funds may be appropriate. Allfirst states that these

disclosures will be based on the requirements of PTE 77-4 (42 FR 18732,

April 8, 1977).2

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\2\ PTE 77-4, in pertinent part, permits the purchase and sale

by an employee benefit plan of shares of a registered, open-end

investment company when a fiduciary with respect to the plan is also

the investment adviser for the investment company, provided that,

among other things, the plan does not pay an investment management,

investment advisory, or similar fee with respect to the plan assets

invested in such shares for the entire period of such investment.

Section II(c) of PTE 77-4 states that this condition does not

preclude the payment of investment advisory fees by the investment

company under the terms of an investment advisory agreement adopted

in accordance with section 15 of the Investment Company Act of 1940.

Section II(c) states further that this condition does not preclude

payment of an investment advisory fee by the plan based on total

plan assets from which a credit has been subtracted representing the

plan's pro rata share of investment advisory fees paid by the

investment company.

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On the basis of such information, the Second Fiduciary will

authorize Allfirst to invest the Client Plan's assets in the ARK Funds

and to receive fees from the ARK Funds.

7. Allfirst will charge investment advisory fees to the ARK Funds

in accordance with the investment advisory agreements between Allfirst

and the ARK Funds. These agreements will be approved by the independent

members of the Board of Directors of the ARK Funds, in accordance with

the applicable provisions of the 1940 Act, and any subsequent changes

in the fees will have to be approved by such Directors. These fees also

will not be increased without the approval of the shareholders of the

affected ARK Funds. The fees will be paid monthly by the ARK Funds. In

addition, FMB Trust Company, an affiliate of Allfirst, will charge fees

for custody services, or other services, it will provide to the ARK

Funds in accordance with a custodial services agreement and other

agreements negotiated with the ARK Funds.

Allfirst will avoid charging the Client Plans duplicative

investment management fees by either: (a) Crediting the Client Plan's

pro rata share of the Fund advisory fees back to the Client Plan; or

(b) waiving any investment management fee for the Client Plan at the

Plan-level.

The ``crediting'' fee structure will be designed to preserve the

negotiated fee rates of the Client Plans so as to minimize the impact

of the change to the ARK Funds on a Client Plan's fees. Allfirst will

charge a Client Plan its standard fees as applicable to the particular

Client Plan for serving as trustee, directed trustee, investment

manager, or custodian. At the beginning of each month, and in no event

later than the same day as the payment of investment advisory fees by

the ARK

[[Page 57134]]

Funds to Allfirst for the previous month, Allfirst will credit to each

Client Plan in cash its proportionate share of all investment advisory

fees charged by Allfirst to the ARK Funds for the previous month. The

credit will include the Client Plan's share of any investment advisory

fees paid by Allfirst to third party sub-advisors.

Allfirst states that the credit will not include the custodial fees

payable by the ARK Funds to FMB Trust Company, or any other affiliate

of Allfirst who may serve in that capacity in the future, because

custodial services rendered at the Fund-level will not be duplicative

of any services provided directly to the Client Plan. The custodial

services to the Fund will involve maintaining custody and providing

reporting relative to the individual securities owned by the Fund. The

services to the Client Plan will involve maintaining custody over all

or a portion of the Client Plan's assets (which may include Fund

shares, but not the assets underlying the Fund shares), providing trust

accounting and participant accounting (if applicable), providing asset

and transaction reporting, execution and settlement of directed

transactions, processing benefit payments and loans, maintaining

participant accounts, valuing plan assets, conducting non-

discrimination testing, preparing Forms 5500 and other required

filings, and producing statements and reports regarding overall plan

and individual participant holdings. Allfirst states that these trust

services will be necessary regardless of whether the Client Plan's

assets are invested in the ARK Funds. Thus, Allfirst represents that

its proposed receipt of fees for both secondary services at the Fund-

level and trustee services at the Plan-level will not involve the

receipt of ``double fees'' for duplicative services to the Client Plans

because a Fund will be charged for custody and other services relative

to the individual securities owned by the Fund, while a Client Plan

will charged for the maintenance of Plan accounts reflecting ownership

of the Fund shares and other assets.3

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\3\ The Department notes that although certain transactions and

fee arrangements are the subject of an administrative exemption, a

Client Plan fiduciary must still adhere to the general fiduciary

responsibility provisions of section 404 of the Act. Thus, the

Department cautions the fiduciaries of the Client Plans investing in

the ARK Funds that they will have an ongoing duty under section 404

of the Act to monitor the services provided to the Client Plans to

ensure that the fees paid by the Client Plans for such services are

reasonable in relation to the value of the services provided. Such

responsibilities will include determinations that the services

provided are not duplicative and that the fees are reasonable in

light of the level of services provided.

The Department also notes that Allfirst, as a trustee and

investment manager for a Client Plan in connection with the decision

to invest Client Plan assets in the ARK Funds, will have a fiduciary

duty to monitor all fees paid by a Fund to Allfirst, its affiliates,

and third parties for services provided to the Fund to ensure that

the totality of such fees will be reasonable and will not involve

the payment of any ``double'' fees for duplicative services to the

Fund by such parties.

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Allfirst represents that for each Client Plan, the combined total

of all fees it will receive directly and indirectly from the Client

Plans for the provision of services to the Plans and/or to the ARK

Funds will not be in excess of ``reasonable compensation'' within the

meaning of section 408(b)(2) of the Act.4

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\4\ The Department is expressing no opinion in this proposed

exemption as to whether the fee arrangements discussed herein will

comply with section 408(b)(2) of the Act and the regulations

thereunder (see 29 CFR 2550.408b-2).

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8. Allfirst will maintain a system of internal accounting controls

for the crediting of all fees to the Client Plans. In addition,

Allfirst has retained the services of PricewaterhouseCoopers LLP (the

Auditor), an independent accounting firm, to audit annually the

crediting of fees to the Client Plans under this program. Such audits

will provide independent verification of the proper crediting to the

Client Plans.

In its annual audit of the credit program, the Auditor will: (i)

Review and test compliance with the specific operational controls and

procedures established by Allfirst for making the credits; (ii) verify

on a test basis the monthly credit factors transmitted to Allfirst by

the ARK Funds; (iii) verify on a test basis the proper assignment of

identification fields to the Client Plans; (iv) verify on a test basis

the credits paid in total to the sum of all credits paid to each Client

Plan; and (v) recompute, on a test basis, the amount of the credit

determined for selected Client Plans and verify that the credit was

made to the proper Client Plan account.

In the event either the internal audit by Allfirst or the

independent audit by the Auditor identifies an error made in the

crediting of fees to the Client Plans, Allfirst will correct the error.

With respect to any shortfall in credited fees to a Client Plan,

Allfirst will make a cash payment to the Client Plan equal to the

amount of the error plus interest paid at money market rates offered by

Allfirst for the period involved. Any excess credits made to a Client

Plan will be corrected by an appropriate deduction from the Client Plan

account or reallocation of cash during the next payment period after

discovery of the error to reflect accurately the amount of total

credits due to the Client Plan for the period involved.

9. Allfirst represents that the use of the ``crediting'' fee

structure will be available for any investments made by Client Plans in

the ARK Funds. The use of this fee structure must be approved prior to

the Client Plan's initial investment in the ARK Funds by a Second

Fiduciary acting for the Client Plan. The Second Fiduciary will receive

full and detailed written disclosure of information concerning the ARK

Funds in advance of any investment by the Client Plan in the ARK Funds,

including the Fund prospectuses as well as a separate statement

describing the crediting fee structure.

After consideration of such information, the Second Fiduciary will

authorize in writing the investment of assets of the Client Plan in one

or more specified ARK Funds and the fees to be paid by the ARK Funds to

Allfirst. In addition, the Second Fiduciary of each Client Plan

invested in a particular Fund will receive full written disclosure, in

a statement separate from the Fund prospectus, of any proposed

increases in the rates of fees charged by Allfirst to the ARK Funds for

secondary services which are above the rates reflected in the Fund

prospectuses, at least thirty (30) days prior to the effective date of

such increase.

In the event that Allfirst provides an additional secondary service

for which a fee is charged or there is an increase in the rate of fees

paid by the ARK Funds to Allfirst for any secondary service, including

any increase resulting from a decrease in the number or kind of

services performed by Allfirst for such fees in connection with a

previously authorized secondary service, Allfirst will, at least 30

days in advance of the implementation of such additional service or fee

increase, provide written notice to the Second Fiduciary explaining the

nature and the amount of the additional service for which a fee will be

charged or the nature and amount of the increase in fees of the

affected Fund.5 Such notice

[[Page 57135]]

will be made separate from the Fund prospectus and will be accompanied

by a Termination Form. The Second Fiduciary also will receive full

written disclosure in a Fund prospectus or otherwise of any increases

in the rate of fees charged by Allfirst to the ARK Funds for investment

advisory services, even though such fees will be credited to the

investing Client Plans.

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\5\ With respect to increases in fees, the Department notes that

an increase in the amount of a fee for an existing secondary service

(other than through an increase in the value of the underlying

assets in the ARK Funds), or the imposition of a fee for a newly-

established secondary service, shall be considered an increase in

the rate of such fees. However, in the event a secondary service fee

has already been described in writing to the Second Fiduciary and

the Second Fiduciary has provided authorization for the fee, and

such fee was temporarily waived, no further action by Allfirst would

be required in order for the Bank to receive such fee at a later

time. Thus, for example, no further disclosure would be necessary if

Allfirst had received authorization for a fee for custodial services

from Plan investors and subsequently determined to waive the fee for

a period of time in order to attract new investors but later charged

the fee.

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The authorizations made by a Second Fiduciary of any Client Plan

will be terminable at will, without penalty to the Client Plan, upon

receipt by Allfirst of written notice of termination. A form (the

Termination Form) expressly providing an election to terminate the

authorization, with instructions on the use of the form, will be

supplied to the Second Fiduciary no less than annually. However, the

Termination Form will not need to be supplied to the Second Fiduciary

for an annual reauthorization sooner than six months after such

Termination Form is supplied for an additional service or for an

increase in fees (as discussed above), unless another Termination Form

is required to disclose additional services or fee increases. The

Termination Form will instruct the Second Fiduciary that the

authorization is terminable at will by the Client Plan, without penalty

to the Client Plan, upon receipt by Allfirst of written notice from the

Second Fiduciary, and that failure to return the Termination Form will

result in the continued authorization of Allfirst to engage in the

subject transactions on behalf of the Client Plan.

The Termination Form will be used to notify Allfirst in writing to

effect a termination by selling the shares of the ARK Funds held by the

Client Plan, requesting such termination within one business day

following receipt by Allfirst of the form. If, due to circumstances

beyond the control of Allfirst, the sale cannot be executed within one

business day, Allfirst will be obligated to complete the sale within

the next business day.

10. Allfirst represents that for smaller Client Plans, the Fund-

level investment advisory fees generally do not exceed the Plan-level

investment management fees, so that the Client Plan will not benefit

from a Fund-level fee credit. In these cases, if the Second Fiduciary

authorizes the fee structure, Allfirst will waive the Plan-level

investment management fees that would otherwise be charged for the

Client Plan's assets invested in the ARK Funds, so that the Plan-level

fees will be offset and the Client Plan will pay only one investment

management fee for those assets, at the Fund-level. This fee structure,

which is one of the fee structures described in PTE 77-4, will ensure

that Allfirst does not receive any additional investment management,

advisory or similar fee as a result of investments in the ARK Funds by

the Client Plans.

Disclosures, approvals, and notifications with regard to any

changes in fees or secondary services will be handled in the same

manner as for the fee structure described in paragraph 10 above, with

one exception. The exception is that notifications with regard to

increases in rates of investment advisory fees for the ARK Funds will

conform to the procedures for increases in rates of secondary service

fees as described above. Therefore, in such instances, there will be

prior written notification of the fee increase to the Second Fiduciary

for the Client Plan and a Termination Form will be provided. The reason

for the exception is that the total fees paid by the Client Plan, under

this fee structure, will be directly affected by any increases in Fund-

level investment advisory fees because such fees will not be credited

back to the Client Plan.

11. Allfirst states that a Second Fiduciary will always receive a

written statement giving full disclosure of the fee structures prior to

any investment in the ARK Funds. The disclosure statement will explain

why Allfirst believes that the investment of assets of the Client Plan

in the ARK Funds may be appropriate. The disclosure statement also will

describe whether there are any limitations on Allfirst with respect to

which Client Plan assets may be invested in shares of the ARK Funds

and, if so, the nature of such limitations.6

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\6\ See section II(d) of PTE 77-4 which requires, in pertinent

part, that an independent plan fiduciary receive a current

prospectus issued by the investment company and a full and detailed

written disclosure of the investment advisory and other fees charged

to or paid by the plan and the investment company, including a

discussion of whether there are any limitations on the fiduciary/

investment adviser with respect to which plan assets may be invested

in shares of the investment company and, if so, the nature of such

limitations.

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12. On an annual basis, the Second Fiduciary of a Client Plan

investing in the ARK Funds will receive copies of the current Fund

prospectuses and, upon such fiduciary's request, a copy of the

Statement of Additional Information for such ARK Funds, as well as

copies of the annual financial disclosure reports containing

information about the Fund and independent auditor findings.

In addition, if the ARK Funds obtain brokerage services in the

future from any broker-dealers that are affiliates of Allfirst,

Allfirst will provide at least annually to the Second Fiduciary of

Client Plans investing in the ARK Funds written disclosures indicating

the following: (i) The total, expressed in dollars, of brokerage

commissions of each Fund that are paid to Allfirst by such Fund; (ii)

the total, expressed in dollars, of brokerage commissions of each Fund

that are paid by such Fund to brokerage firms unrelated to Allfirst;

(iii) the average brokerage commissions per share, expressed as cents

per share, paid to Allfirst by each Fund portfolio; and (iv) the

average brokerage commissions per share, expressed as cents per share,

paid by each Fund portfolio to brokerage firms unrelated to Allfirst.

All such brokerage services would be provided in accordance with

section 17(e) of the 1940 Act and Rule 17e-1 thereunder. Such

provisions require, among other things, that the commissions, fees, or

other remuneration for any brokerage services provided by an affiliate

of an investment company's investment adviser be reasonable and fair

compared to what other brokers receive for comparable transactions

involving similar securities.

13. No sales commissions will be paid by the Client Plans in

connection with the purchase or sale of shares of the ARK Funds. In

addition, no redemption fees will be paid in connection with the sale

of shares by the Client Plans to the ARK Funds. Allfirst states that it

will not receive any fees payable pursuant to Rule 12b-1 under the 1940

Act in connection with the transactions. Allfirst states further that

all other dealings between the Client Plans and the ARK Funds will be

on a basis no less favorable to the Client Plans than such dealings

will be with the other shareholders of the ARK Funds.

14. In summary, Allfirst represents that the transactions described

herein will satisfy the statutory criteria of section 408(a) of the Act

because: (a) The ARK Funds will provide the Client Plans with a more

effective investment vehicle than collective investment ARK Funds

maintained by Allfirst without any increase in investment management,

advisory, or similar fees paid to Allfirst; (b) Allfirst will require

annual audits by an independent accounting firm to verify the proper

crediting to the Client Plans of investment advisory fees charged by

Allfirst to the ARK Funds; (c) with respect to any investments in a

Fund by the Client Plans and the payment of any fees by the Fund to

Allfirst, a Second Fiduciary will receive full written disclosure of

information concerning the Fund, including a current prospectus and a

statement describing the fee structure, and will authorize in writing

the investment of the Client

[[Page 57136]]

Plan's assets in the Fund and the fees paid by the Fund to Allfirst;

(d) any authorizations made by a Client Plan regarding investments in a

Fund and fees to be paid to Allfirst, or any increases in the rates of

fees for secondary services which will be retained by Allfirst, will be

terminable at will by the Client Plan, without penalty to the Client

Plan, upon receipt by Allfirst of written notice of termination from

the Second Fiduciary; (e) no commissions or redemption fees will be

paid by the Client Plan in connection with either the acquisition of

Fund shares or the sale of Fund shares; (f) Allfirst will not receive

any fees payable pursuant to Rule 12b-1 under the 1940 Act in

connection with the transactions; and (g) all dealings between the

Client Plans and the ARK Funds will be on a basis which is at least as

favorable to the Client Plans as such dealings are with other

shareholders of the ARK Funds.

FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams or Ms. Karin Weng of

the Department, telephone (202) 219-8194 or 219-8881, respectively.

(These are not toll-free numbers.)

John Hancock Mutual Life Insurance Company (John Hancock), Located

in Boston, Masachusetts

[Application No. D-10718]

Proposed Exemption

Based on the facts and representations set forth in the

application, the Department is considering granting an exemption under

the authority of section 408(a) of the Act and in accordance with the

procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,

32847, August 10, 1990).7

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\7\ For purposes of this proposed exemption, reference to

provisions of Title I of the Act, unless otherwise specified, refer

also to the corresponding provisions of the Code.

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Section I--Covered Transactions

If the exemption is granted, the restrictions of section 406(a) of

the Act and the sanctions resulting from the application of section

4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the

Code, shall not apply to: (1) The receipt of common stock of John

Hancock Financial Services, Inc., the holding company for John Hancock

(the Holding Company); or (2) the receipt of cash or policy credits, by

or on behalf of any eligible policyholder (the Eligible Policyholder)

of John Hancock which is an employee benefit plan (the Plan), subject

to applicable provisions of the Act and/or the Code, other than certain

Eligible Policyholders which are Plans maintained by John Hancock or an

affiliate for their own employees (the John Hancock Plans), in exchange

for such Eligible Policyholder's membership interest in John Hancock,

in accordance with the terms of a plan of reorganization (the Plan of

Reorganization) adopted by John Hancock and implemented pursuant to

Chapter 175 of the Massachusetts General Laws.

In addition, the restrictions of section 406(a)(1)(E) and (a)(2)

and section 407(a)(2) of the Act shall not apply to the receipt or

holding, by the John Hancock Plans, of employer securities in the form

of excess Holding Company stock, in accordance with the terms of the

Plan of Reorganization.

This proposed exemption is subject to the conditions set forth

below in Section II.

Section II--General Conditions

(a) The Plan of Reorganization is implemented in accordance with

procedural and substantive safeguards that are imposed under

Massachusetts Insurance Law and is subject to review and supervision by

the Massachusetts Commissioner of Insurance (the Commissioner).

(b) The Commissioner reviews the terms of the options that are

provided to Eligible Policyholders of John Hancock as part of such

Commissioner's review of the Plan of Reorganization, and the

Superintendent only approves the Plan of Reorganization following a

determination that such Plan of Reorganization is fair and equitable to

all Eligible Policyholders and is not detrimental to the public.

(c) Both the Commissioner and the Superintendent concur on the

terms of the Plan of Reorganization.

(d) Each Eligible Policyholder has an opportunity to vote to

approve the Plan of Reorganization after full written disclosure is

given to the Eligible Policyholder by John Hancock.

(e) One or more independent fiduciaries of a Plan that is an

Eligible Policyholder receives Holding Company stock, cash or policy

credits pursuant to the terms of the Plan of Reorganization and neither

John Hancock nor any of its affiliates exercises any discretion or

provides ``investment advice,'' as that term is defined in 29 CFR

2510.3-21(c), with respect to such acquisition.

(f) After each Eligible Policyholder is allocated 17 shares of

Holding Company stock, additional consideration is allocated to

Eligible Policyholders who own participating policies based on

actuarial formulas that take into account each participating policy's

contribution to the surplus of John Hancock which formulas have been

approved by the Commissioner.

(g) With respect to a John Hancock Plan, where the consideration

may be in the form of Holding Company stock an independent Plan

fiduciary --

(1) Determines whether the Plan of Reorganization is in the best

interest of the John Hancock Plans and their participants and

beneficiaries.

(2) Votes at the special meeting of Eligible Policyholders on the

proposal to approve or not to approve the Plan of Reorganization.

(3) If the vote is to approve the Plan or Reorganization,

(i) Decides whether the affected John Hancock Plan should receive

Holding Company stock or cash (should the latter option be available)

and receives such consideration on behalf of the affected John Hancock

Plan;

(ii) Monitors, on behalf of the affected John Hancock Plan, the

acquisition and holding of the shares of any Holding Company stock

received;

(iii) Makes determinations on behalf of the John Hancock Plan with

respect to voting and the continued holding of the shares of Holding

Company stock received by such Plan; and

(iv) Disposes of any Holding Company stock held by the John Hancock

Plan which exceeds the limitation of section 407(a)(2) of the Act as

reasonably as practicable but in no event later than six months year

following the effective date of the demutualization;

(v) Takes all actions that are necessary and appropriate to

safeguard the interests of the John Hancock Plans; and

(vi) Provides the Department with a complete and detailed final

report as it relates to the John Hancock Plans prior to the effective

date of the demutualization.

(h) All Eligible Policyholders that are Plans participate in the

transactions on the same basis within their class groupings as other

Eligible Policyholders that are not Plans.

(i) No Eligible Policyholder pays any brokerage commissions or fees

in connection with their receipt of Holding Company stock or in

connection with the implementation of the commission-free sales and

purchase programs.

(j) All of John Hancock's policyholder obligations remain in force

and are not affected by the Plan of Reorganization.

Section III--Definitions

For purposes of this proposed exemption:

(a) The term ``John Hancock'' means The John Hancock Mutual Life

Insurance Company and any affiliate of John Hancock as defined in

paragraph (b) of this Section III.

[[Page 57137]]

(b) An ``affiliate'' of John Hancock includes --

(1) Any person directly or indirectly through one or more

intermediaries, controlling, controlled by, or under common control

with John Hancock (For purposes of this paragraph, the term ``control''

means the power to exercise a controlling influence over the management

or policies of a person other than an individual.);

(2) Any officer, director or partner in such person; and

(3) Any corporation or partnership of which such person is an

officer, director or a 5 percent partner or owner.

(c) The term ``Eligible Policyholder'' means a policyholder whose

name appears on the conversion date on John Hancock's records as the

owner of a policy under which there is a right to vote and which, on

both the December 31 immediately preceding the conversion date and the

date the John Hancock's Board of Directors first votes to convert to

stock form, is in full force for its full basic benefits with no unpaid

premiums or consideration at the expiration of any applicable grace

period, or which is being continued under a nonforfeiture benefit and

continues to be eligible for participation in John Hancock's annual

distribution of divisible surplus.

(d) The term ``policy credit'' means: (1) For an individual or

joint ordinary life insurance policy, an increase to the paid-up

dividend addition value; and (2) for all other individual or joint life

policies and annuities, (i) if the policy or contract has a defined

account value, an increase in the account value, or (ii) if the policy

or contract does not have a defined account value, an increase to the

dividend accumulation fund.

Summary of Facts and Representations

1. John Hancock is a mutual life insurance company organized under

the laws of the Commonwealth of Massachusetts on April 18, 1862. As of

December 31, 1998, John Hancock and its subsidiaries had total assets

in excess of $76 billion and had approximately $310 billion of

individual life insurance in force.

John Hancock has a number of subsidiaries and affiliates that

provide a variety of financial services, including investment

management and brokerage services. John Hancock and its investment

management subsidiaries had approximately $124.4 billion in assets

under management as of December 31, 1998. As a mutual life insurance

company, John Hancock has no stockholders. Instead, policyholders of

John Hancock are ``members'' of the company and in that capacity, they

are entitled to vote to elect the directors of the company and would be

entitled to share in the assets of the company if it were liquidated.

2. John Hancock and its affiliates provide a variety of fiduciary

and other services to employee benefit plans covered under relevant

provisions of the Act and the Code. By providing these services John

Hancock may be considered a party in interest with respect to such

Plans under section 3(14)(A) and (B) of the Act or the related

derivative provisions. The services provided by John Hancock and its

affiliates to Plans include plan administration, investment management

and related services. Many of the Plans to which John Hancock provides

services are also John Hancock policyholders. As of December 31, 1997

(the most recent date such information is available), John Hancock had

issued over 27,000 outstanding policies and contracts to employee

pension and welfare benefit plans. These Plans include defined benefit

pension plans, defined contribution plans (such as section 401(k)

plans), and welfare benefit plans providing welfare benefit plan

coverage such as group life, short- and long-term disability,

accidental death and dismemberment and group health coverage.

3. John Hancock and its affiliates also sponsor the following

Plans, which are collectively referred to herein as ``the John Hancock

Plans'':

(a) The John Hancock Mutual Life Insurance Company Pension Plan

(the Pension Plan) is a defined benefit pension plan that benefits the

home office and the field employees of the company as well as its

unionized managerial agents and employees of most of John Hancock's

domestic subsidiaries. The trustee of the Pension Plan is Investors

Bank & Trust Company (Investors). Investment decisions for the Pension

Plan are made by either of two internal committees within John Hancock,

i.e., the Directors' Employee Benefits Plan Committee or the Plan

Investment Advisory Committee. As of December 31, 1998, the Pension

Plan had approximately 26,818 participants and total assets of

$2,056,832,491.

(b) The Pension Plan for Personnel in the General Agencies of John

Hancock Mutual Life Insurance Company (the GA Pension Plan) is a

multiple employer, defined benefit pension plan that covers statutory

employees of John Hancock's general agencies. The trustee of the GA

Pension Plan is Investors. The decisionmakers with respect to

investments for the GA Pension Plan are the two internal committees

identified above in paragraph 3(a). As of December 31, 1997 (the most

recent date such information is available), the GA Pension Plan had

4,668 participants and total assets of $186,343,278.

(c) The Investment-Incentive Plan for John Hancock Employees (TIP)

is a section 401(k) profit sharing plan covering home office employees

of John Hancock as well as certain domestic subsidiaries. The trustee

of TIP is Investors. Because TIP is participant-directed and intended

to qualify under section 404(c) of the Act, its investment options are

selected by two internal committees within John Hancock. They are the

Directors' Employee Benefits Plan Committee and the Savings Plan

Investment Committee. As of December 31, 1998, TIP had 8,655

participants and total assets of $848,545,190.

(d) The John Hancock Savings and Investment Plan (SIP) is a section

401(k) profit sharing plan covering unionized managerial agents of John

Hancock as well as certain other employees in the managerial agency

system. SIP shares the same trustee and decision-making committees as

TIP. As of December 31, 1998, SIP had 2,145 participants and total

assets of $135,847,910.

(e) The John Hancock Mutual Life Insurance Company Employee Welfare

Plan (the Employee Welfare Plan) is a welfare benefit plan maintained

by John Hancock and its employees and those of its domestic

subsidiaries. The Employee Welfare Plan provides health, life

insurance, dental, vision, temporary and long-term disability, and

long-term care coverage. The Employee Welfare Plan has 3 trustees, each

of whom is an officer of John Hancock. Investment decisions for the

non-insurance plan assets of the Employee Welfare Plan are made by the

same investment committees as the Pension Plan described above in

paragraph 3(a). As of December 31, 1997, the Employee Welfare Plan had

17,148 participants (including beneficiaries of deceased participants)

and total assets of $87,066,100.

(f) The GA Association Employee Welfare Plan (the GA Employee

Welfare Plan is a multiple employer welfare benefit plan maintained by

John Hancock to enable General Agents who are members of the John

Hancock General Agency Association to provide benefits to personnel who

are common law or statutory employees of the general agencies. The GA

Employee Welfare Plan, which provides health, life, long-term

disability and voluntary accidental death and dismemberment benefits,

is a fully-insured arrangement. As of December 31, 1998, the GA

Employee Welfare Plan had 3,595 participants.

[[Page 57138]]

(g) The John Hancock Funds 401(k) Plan (the 401(k) Plan). The John

Hancock 401(k) Plan is maintained by the Berkeley Financial Group which

consists of a group of companies that operate John Hancock's mutual

fund business. The John Hancock 401(k) Plan covers employees of that

group. The John Hancock 401(k) Plan, which provides for a cash and

deferred compensation arrangement, has 3 trustees. Investment decisions

for the John Hancock 401(k) Plan are made by the participants. As of

December 31, 1998, the John Hancock 401(k) Plan had 792 participants

and total assets of $26,590,219.

(h) The John Hancock Property & Casualty Money Purchase Pension

Plan (the Property & Casualty Plan). John Hancock holds a small

guaranteed investment contract on behalf of the Property & Casualty

Plan which was established for its former property and casualty

subsidiary. The Property & Casualty Plan, which formerly provided

retirement benefits until it was frozen, has one trustee who is

responsible for making investment decisions affecting such Plan. As of

December 31, 1998, the Property & Casualty Plan had 1,311 participants

and total assets of $670,147.

In addition to the above, John Hancock holds a group life policy on

behalf of certain retirees of Unigard Property and Casualty Company.

Although this company was sold recently, John Hancock retains certain

benefit responsibilities with respect to its retiree population.

3. John Hancock's Board of Directors authorized its management to

develop a plan of demutualization (i.e., the Plan of Reorganization)

pursuant to which John Hancock would be converted from a mutual life

insurance company to a stock life insurance company. On August 31,

1999, John Hancock's Board of Directors formally adopted the Plan of

Reorganization.

In order to implement the Plan of Reorganization, John Hancock

requests an individual exemption from the Department that would cover

the receipt of Holding Company stock, cash or policy credits by

Eligible Policyholders that are Plans in exchange for their existing

membership interests in John Hancock. Although John Hancock is not

requesting an exemption for distributions of Holding Company stock to

the Pension Plan, the GA Pension Plan, TIP, SIP, the 401(k) Plan and

the Property & Casualty Plan because it believes such stock would

constitute ``qualifying employer securities'' within the meaning of

section 407(d)(5) of the Act and that section 408(e) would apply to

such distributions,8 it is nevertheless requesting exemptive

relief from the Department to the extent that John Hancock Plans, such

as the Employee Welfare Plan and the GA Employee Welfare Plan, receive

Holding Company stock which results in violations of section

406(a)(1)(E) and (a)(2) of the Act and section 407(a)(2) of the

Act.9 Since the Holding Company stock that will be held by

these John Hancock Plans will exceed 10 percent of the fair market

value of the assets of such Plans, John Hancock has retained U.S. Trust

Company, N.A. (U.S. Trust) to serve as the independent fiduciary for

these Plans as well as for any other John Hancock Plan whose Holding

Company Stock exceeds 10 percent of such Plan's assets.

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\8\ The Department expresses no opinion herein on whether the

Holding Company stock will constitute qualifying employer securities

and whether such distributions will satisfy the terms and conditions

of section 408(e) of the Act.

\9\ Section 406(a)(1)(E) of the Act prohibits the acquisition by

a plan of any employer security which would be in violation of

section 407(a) of the Act. Section 406(a)(2) of the Act states that

no fiduciary who has authority or discretion to control the assets

of a plan shall permit the plan to hold any employer security if he

[or she] knows that holding such security would violate section

407(a) of the Act. Section 407(a)(1) of the Act prohibits the

acquisition by a plan of any employer security which is not a

qualifying employer security. Section 407(a)(2) of the Act provides

that a plan may not acquire any qualifying employer security, if

immediately after such acquisition, the aggregate fair market value

of such securities exceeds 10 percent of the fair market value of

the plan's assets.

In addition to the above, section 407(f) of the Act, which is

applicable to the holding of a qualifying employer security by a

plan other than an eligible individual account plan, requires that:

(a) Immediately following its acquisition by a plan, no more than 25

percent of the aggregate amount of stock of the same class issued

and outstanding at the time of acquisition is held by the plan; and

(b) at least 50 percent of the stock be held by persons who are

independent of the issuer. John Hancock notes, however, that the

holding by the John Hancock Plans of shares of Holding Company stock

will not violate the provisions of section 407(f) of the Act.

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4. John Hancock proposes to convert from a mutual life insurance

company to a stock life insurance company under Massachusetts Insurance

Law. The principal purposes for the reorganization are to enhance John

Hancock's access to capital markets and raise capital that would permit

it and the Holding Company to expand their existing business and

develop new business opportunities in the insurance and financial

services industries. Growth will enable John Hancock to reduce its unit

expenses through economies of scale. This growth will be facilitated by

John Hancock's ability to acquire other companies using its own stock

as acquisition currency. Additionally, access to capital markets will

enable John Hancock to invest in new technology, improved customer

service, new products and channels of distribution. John Hancock will

also obtain more financial flexibility with which to maintain its

ratings and financial stability.

In addition, the reorganization of John Hancock pursuant to the

Plan of Reorganization will provide Eligible Policyholders with shares

of common stock of the Holding Company, cash or policy credits in

exchange for their illiquid membership interests. Thus, Eligible

Policyholders will realize economic value from their membership

interests that is otherwise unavailable to them. However, the

demutualization will not, in any way, reduce the benefits, values,

guarantees or dividend eligibility of existing policies or contracts

issued by John Hancock.

As part of the reorganization, the Holding Company will be

established and will become the stock holding company for John Hancock

and its subsidiaries. Therefore, after the reorganization, John

Hancock, as a stock insurer and a subsidiary of the Holding Company,

will have access through the Holding Company to the capital markets,

enabling John Hancock to obtain capital from a variety of sources. The

Holding Company will also own 100 percent of two new holding companies

being established to own existing Canadian subsidiaries of John Hancock

and most other foreign insurance subsidiaries, respectively. Most

foreign operations are being separated from the domestic operations of

John Hancock to achieve improved financial ratios for John Hancock and

maximize performance results for policyholders and shareholders.

John Hancock's management believes that the holding company

structure will provide several benefits to John Hancock. In this

regard, this structure will afford increased flexibility in raising

additional capital in the form of debt and equity financings and in

pursuing growth in John Hancock's current and future insurance and non-

insurance business. The new organization will benefit from increased

flexibility in allocating capital and resources among the various

subsidiaries of John Hancock. Further, the transfer of the

international subsidiaries to the Holding Company will provide a

distinct focus for the foreign operations of John Hancock while also

improving its risk-based capital ratio.

5. The terms of the Plan of Reorganization are subject to the

approval of the Commissioner of Insurance of the Commonwealth of

[[Page 57139]]

Massachusetts. However, market conditions, regulatory requirements and

business considerations may also influence the final sequence of

events. Subject to the foregoing, under John Hancock's internal working

proposal for carrying out the demutualization, it is currently expected

that the following steps will occur pursuant to the Plan of

Demutualization:

(a) Formation of a Stock Life Insurance Company. John Hancock will

demutualize and become a stock life insurance company by operation of

section 19E of Chapter 175 of the General Laws of the Commonwealth of

Massachusetts. Under the Plan of Reorganization, each policyholder's

membership interest in John Hancock will be extinguished. As

compensation for their membership interests, Eligible Policyholders

will receive shares of Holding Company stock, cash or policy credits.

John Hancock will become a stock company and a wholly owned subsidiary

of the Holding Company. The Holding Company will also own the

outstanding shares of two newly-formed holding companies which will own

John Hancock's Canadian business and most of its international

businesses, respectively.

(b) Initial Public Offering (the IPO). The Holding Company will

sell new Holding Company shares in an underwritten IPO, on the date of

the demutualization of John Hancock. It is expected that the

demutualization will occur during early February 2000. However, the

effective date may be extended for a period of up to six months if

requested by John Hancock subject to approval by the Commissioner. At

present, the size of the IPO is not known.

(c) Contribution to the Capital of John Hancock. Following the

transactions described above, the Holding Company will contribute cash

raised in the IPO (after the payment of transaction expenses) to John

Hancock in an amount at least equal to the amount required for John

Hancock to maintain a risk-based capital ratio of not less than 200

percent following the payment and crediting of cash and establishment

of reserves for policy credits called for by the Plan of Reorganization

and the payment of expenses resulting from the transactions

contemplated by the Plan of Reorganization.

6. In addition to providing enhanced capital markets, it is

anticipated that the demutualization will provide the flexibility to

cause John Hancock's non-insurance operations to become direct holdings

of an ``upstream'' holding company. Further, the conversion will enable

John Hancock to use stock options or other equity-based compensation

arrangements in order to attract and retain talented employees.

John Hancock believes these consequences of the conversion will

benefit all of its policyholders. John Hancock further explains that

its insurance policies will remain in force and policyholders will be

entitled to receive the benefits under their policies and contracts to

which they would have been entitled if the Plan of Reorganization had

not been adopted.

7. As noted above, John Hancock will demutualize under

Massachusetts Insurance Law. Section 19E of the Massachusetts

demutualization law establishes an approval process for the

demutualization of a life insurance company organized under

Massachusetts law. Specifically, Section 19E requires that the

demutualization plan be filed with, and approved by, the Massachusetts

Commissioner of Insurance. The Commissioner may approve the

demutalization plan only after notice is given to the insurer, its

directors, officers, employees and policyholders and a hearing on such

plan is held. All persons to whom notice is given have the right to

appear and be heard at the hearing and to present oral or written

comments.10

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\10\ Final approval by the Commissioner is expected to occur on

or about January 15, 2000. The public hearing regarding the proposed

Plan of Reorganization is expected to occur around November 25,

1999.

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After the hearing, John Hancock explains that the Commissioner will

approve the demutualization plan if she determines that the plan is not

prejudicial to the insurer's policyholders or to the ``insuring

public.'' The Commissioner must also determine that the demutualization

plan conforms to the provisions of Section 19E. In pertinent part,

Section 19E requires--

(a) that reasonable notice of and the procedure for vote of the

policyholders have been provided;

(b) that the plan gives each eligible policyholder, in exchange

for his or her membership interests in the insurer, appropriate

consideration determined under a fair and reasonable formula, which

is based upon the insurer's entire surplus as adjusted according to

paragraph 3 of section 19E;

(c) that, subject to certain exceptions, the plan gives each

eligible policyholder a preemptive right to acquire his or her

proportionate part of all of the proposed capital stock of the

insurer within a reasonable time period, and to apply the amount of

his or her consideration to the purchase of such stock, provided

that, under certain circumstances, the Commissioner has the power to

approve a plan which does not include preemptive rights;

(d) that if, applicable, shares are offered to policyholders at

a price not greater than they are offered under the plan to others;

(e) that the plan provides for the payment to each policyholder

of consideration which may consist of cash, securities, a

certificate of contribution, additional life insurance or annuity

benefits, increased dividends or other consideration or any

combination of such forms of consideration;

(f) that the plan, when completed, shall provide for the

converted insurer's paid-in capital stock to be in an amount not

less than the minimum paid-in capital stock and the net cash surplus

required of a new domestic stock insurer upon initial authorization

to transact like kinds of insurance;

(g) that the insurer's management has not, through reduction in

volume of new business written, or cancellation or through any other

means, sought to reduce, limit or affect the number or identity of

the insurer's policyholders to be entitled to participate in the

demutualization plan, or to otherwise secure for individuals

comprising management any unfair advantage through such

demutualization plan; and

(h) if applicable, that the classifications of management and

employee groups to be offered shares not subscribed for by

policyholders in the preemptive offering are reasonable.

Section 19E permits the Commissioner to employ staff personnel and

to engage outside consultants to assist her in determining whether a

demutualization plan meets the requirements of section 19E and any

other relevant provisions of chapter 175 of Massachusetts General Laws.

A decision by the Commissioner to approve a demutualization plan under

section 19E is subject to judicial review in the Massachusetts courts.

In addition to being approved by the Commissioner, John Hancock

represents that the demutualization plan must be approved by the

policyholders of the insurer. In this regard, under section 19E,

policyholders must be provided with notice of a meeting convened for

the purpose of voting on whether to approve the demutualization plan.

Moreover, the demutalization plan must be approved by a vote of not

less than two-thirds of the votes of approximately 3 million

policyholders who may vote in person, by proxy or by mail.11

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11 The notice of the policyholder meeting were mailed during the

week of September 13, 1999. The policyholder meeting is scheduled to

be convened on or about November 30, 1999.

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8. John Hancock represents that it is licensed to transact business

in all fifty states. However, only the State of New York requires that

a foreign insurance company that is planning to demutualize file a copy

of its demutualization plan with state insurance authorities. In this

regard, John Hancock explains that section 1106(i) of the New York

Insurance Law

[[Page 57140]]

[Section 1106(i)] authorizes the Superintendent to review the

demutualization plan of a foreign life insurer licensed in New York and

to specify the conditions that the Superintendent would impose in order

for the foreign insurer to retain its New York license following its

demutualization. Specifically, Section 1106(i) requires that a foreign

life insurer licensed in New York file with the Superintendent a copy

of the demutualization plan at least 90 days prior to the earlier of

(a) the date of any public hearing required to be held on the plan of

reorganization by the insurer's state of domicile and (b) the proposed

date of the demutualization.

If, after examining the plan of reorganization, the Superintendent

finds that the plan is not fair or equitable to the New York

policyholders of the insurer, the Superintendent must set forth the

reasons for his findings. In addition, the Superintendent must notify

the insurer and its domestic state insurance regulator of his findings

and his reasons for such findings and advise of any requirements he

considers necessary for the protection of current New York

policyholders in order to permit the insurer to continue to conduct

business in New York as a stock life insurer after the demutualization.

In the event the Superintendent has any objections to the Plan of

Reorganization, John Hancock represents that it will amend the Plan so

that it will meet the approval of the Superintendent or otherwise, work

out a satisfactory solution with the Superintendent.

9. John Hancock's Plan of Reorganization will provide for Eligible

Policyholders to receive common stock of the Holding Company, cash or

policy credits as consideration for the termination of their membership

interests in the mutual company, which interests will be extinguished

as a result of the demutualization. For this purpose, an Eligible

Policyholder is essentially a policyholder whose name appears on the

conversion date on the insurer's records as owner of a policy under

which there is a right to vote. On both the December 31 immediately

preceding the conversion date and the date the insurer's board of

directors first votes to convert to stock form, the policy must be in

full force for its full basic benefits with no unpaid premiums or

consideration at the expiration of any applicable grace period.

Alternatively, the policy must be continued under a nonforfeiture

benefit. In any event, the insurance policy must continue to be

eligible for participation in the insurer's annual distribution of

divisible surplus.

Solely for purposes of calculating the amount of Holding Company

stock, cash or policy credits that will be given to an Eligible

Policyholder in exchange for his or her membership interest, John

Hancock will allocate to each Eligible Policyholder (but not

necessarily issue) shares of Holding Company stock equal to the sum of:

(a) A fixed component of consideration consisting of 17 shares of

Holding Company stock; and (b) if applicable, a variable component of

consideration based on the contributions to surplus made by the

Eligible Policyholder's in-force policies. The allocation methodology

must be fair and reasonable, a finding that the Commissioner is

required to make after the hearing. The allocation formulas are also

subject to review by the Superintendent.

10. Section 7.3 of John Hancock's Plan of Reorganization provides

that an Eligible Policyholder will be entitled to receive Holding

Company stock if such Policyholder affirmatively elects, on a form

provided to such Eligible Policyholder that has been properly completed

and received by John Hancock prior to the date of the special

policyholder meeting, a preference to receive stock. Holding Company

stock will also be issued to an Eligible Policyholder, regardless of

such Policyholder's election, to the extent funds available are

inadequate to pay cash to all such Eligible Policyholders who will be

receiving the same number of shares.12

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\12\ John Hancock's Plan of Reorganization provides that, as an

optional method, each non-trusteed, qualified pension or profit

sharing plan that is entitled to receive Holding Company stock may

direct John Hancock to place the stock received as a result of the

demutualization in a master trust (the Master Trust) established by

John Hancock for this express purpose. It is represented that the

John Hancock Plans will not participate in the Master Trust because

they will have their own trusts in place.

The Master Trust, which will be incorporated through the

Adoption Agreement as part of each participating Plan, will have an

indefinite duration. The trustee (the Trustee) of the Master Trust

will be independent of John Hancock. The Trustee will hold the

shares of Holding Company stock for the benefit of the participating

Plan. The stock will remain in the Master Trust until the Plan

fiduciary instructs the Trustee either to sell the stock on the open

market or to distribute the stock to the Plan. A participating Plan

may, under no circumstances, direct the Trustee to sell its shares

of Holding Company stock to the Holding Company. Each Plan will be

responsible for its share of the fees and expenses of the Master

Trust as well as for the payment of brokerage commissions incurred

in connection with the sale of Holding Company Stock after the

termination of the commission-free sales program described in

Representation 13 provided such program has been available to the

Plan.

It is anticipated that all stock dividends that are received by

a Plan will be held in the Master Trust subject to withdrawal by the

Plan at any time. However, cash dividends will be paid by the

Trustee to the applicable Plan. It is also anticipated that all

voting rights will be passed through to the participating Plans.

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In addition, Section 7.3 of John Hancock's Plan of Reorganization

states that an Eligible Policyholder will be entitled to receive cash

in lieu of allocable Holding Company stock where such Eligible

Policyholder's address for mailing purposes, as shown on John Hancock's

records: (a) Is an address where mail is undeliverable or is deemed to

be undeliverable in accordance with guidelines approved by the

Commissioner; or (b) is located outside of the United States. Further,

an Eligible Policyholder will be entitled to receive cash instead of

allocable Holding Company stock to the extent that his or her insurance

policy is subject to a lien or bankruptcy proceeding.

Finally, Section 7.3 of John Hancock's Plan of Reorganization

provides that an Eligible Policyholder will receive policy credits

instead of allocable Holding Company stock with respect to any policy

that is: (a) An individual retirement annuity contract within the

meaning of section 408(b) of the Code or a taxsheltered annuity

contract within the meaning of section 403(b) of the Code; (b) an

individual annuity contract that has been issued pursuant to a plan

qualified plan under section 401(a) of the Code directly to the plan

participant; or (c) an individual life insurance policy that has been

issued pursuant to a plan qualified under section 401(a) of the Code

directly to the plan participant.

The cash or policy credits will have a value equal the greater of

the price per share of Common Stock in the IPO, which will occur at the

time of the demutualization or the average closing price of the Common

Stock as reflected on the New York Stock Exchange for the first twenty

days of trading, subject to a maximum of 120 percent of the initial

stock price.13 This will ensure that

[[Page 57141]]

Eligible Policyholders who receive cash or policy credits will have an

opportunity to benefit from any potential appreciation in the stock

price during the initial trading period.

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\13\ John Hancock represents that under paragraph 5 of Section

19E of Massachusetts Insurance Law, the policyholder eligible to

participate in the distribution of Holding Company stock, cash or

policy credits resulting from the Plan of Reorganization is ``the

person whose name appears * * * on the insurer's records as owner''

of the policy. John Hancock further represents that an insurance or

annuity policy that provides benefits under an employee benefit

plan, typically designates the employer that sponsors the plan, or a

trustee acting on behalf of the plan, as the owner of the policy. In

regard to insurance or annuity policies that designate the employer

or trustee as owner of the policy, John Hancock represents that it

is required under the foregoing provisions of Massachusetts

Insurance Law and the Plan of Reorganization to make distributions

resulting from such Plan to the employer or trustee as owner of the

policy, except as provided below.

Notwithstanding the foregoing, John Hancock's Plan of

Reorganization provides a special rule applicable to an insurance

policy issued to a trust established by John Hancock. This rule

applies whether or not the trust, or any arrangement established by

any employer participating in the trust, constitutes an employee

benefit plan subject to the Act. Under this special rule, the holder

of each individual ``certificate'' issued in connection with the

insurance policy is treated as the policyholder and owner for all

purposes under the Plan of Reorganization, including voting rights

and the distribution of consideration. The trustee of any such trust

established by John Hancock will not be considered a policyholder or

owner and will not be eligible to vote or receive consideration.

In general, it is the Department's view that, if an insurance

policy (including an annuity contract) is purchased with assets of

an employee benefit plan, including participant contributions, and

if there exist any participants covered under the plan (as defined

at 29 CFR 2510.3-3) at the time when John Hancock incurs the

obligation to distribute Holding Company stock, cash or policy

credits, then such consideration would constitute an asset of such

plan. Under these circumstances, the appropriate plan fiduciaries

must take all necessary steps to safeguard the assets of the plan in

order to avoid engaging in a violation of the fiduciary

responsibility provisions of the Act.

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One or more fiduciaries of a Plan which is independent of John

Hancock will receive the consideration and neither John Hancock nor any

of its affiliates will exercise discretion or provide ``investment

advice,'' as that term is defined in 29 CFR 2510.3-21(c) with respect

to any such acquisition. Further, no Eligible Policyholder will pay

brokerage commissions or fees in connection with the receipt of Holding

Company stock.

11. As noted above, in the case of the John Hancock Plans, U.S.

Trust will represent their interests. U.S. Trust will determine whether

the Plan of Reorganization is in the best interest of such Plan and

their participants and beneficiaries; vote at the special meeting of

Eligible Policyholders on the proposal to approve or not to approve the

Plan of Reorganization. If the vote is to approve the Plan of

Reorganization, U.S. Trust will decide whether the affected John

Hancock Plan should receive Holding Company stock or cash (should the

latter option be available) and receives such consideration on behalf

of the affected John Hancock Plan; monitor, on behalf of the affected

John Hancock Plan, the acquisition and holding of the shares of any

Holding Company stock received; make determinations on behalf of the

John Hancock Plan with respect to voting and the continued holding of

the shares of Holding Company stock received by such Plan; dispose of

any Holding Company stock held by the John Hancock Plan which exceeds

the limitation of section 407(a)(2) of the Act as reasonably as

practicable but in no event later than six months following the

effective date of the demutualization; and take all actions that are

necessary and appropriate to safeguard the interests of the John

Hancock Plans. Further, U.S Trust will provide the Department with a

complete and detailed final report as it relates to the John Hancock

Plans prior to the effective date of the demutualization. Finally, U.S.

Trust states that it has conducted a preliminary review of John

Hancock's Plan of Reorganization and it sees nothing in the Plan that

would preclude the Department of Labor from proposing the requested

exemption.

12. The Plan of Reorganization also provides for the establishment

of a commission-free sales program whereby Eligible Policyholders who

receive between 99 or fewer shares of Holding Company stock will be

given the opportunity to sell, at prevailing market prices, all of

their Holding Company stock received without the payment of any

brokerage commissions. The commission-free sales program will

concurrently offer Eligible Policyholders the opportunity to purchase

an additional number of shares necessary to bring their respective

total number of shares up to 100. Again, Eligible Policyholders will

not be required to pay any brokerage commissions or similar fees to

John Hancock. Moreover, John Hancock and its affiliates will not

provide ``investment advice'' as described in 29 CFR 2510.3-21(c) with

regard to the operation of the program. The commission-free sales

program will commence on the first business day after the six month

anniversary of the effective date of the reorganization and will

continue for 90 days thereafter. Such program may be extended with the

approval of the Commissioner if the Board of Directors of the Holding

Company determines such extension would be appropriate and in the best

interest of the Holding Company and its stockholders.

13. In summary, it is represented that the proposed transactions

will satisfy the statutory criteria for an exemption under section

408(a) of the Act because:

(a) The Plan of Reorganization will be implemented in accordance

with stringent procedural and substantive safeguards that are being

imposed under Massachusetts law and will be subject to the review and

supervision of the Commissioner.

(b) The Commissioner will review the terms of the options that are

provided to Eligible Policyholders of John Hancock as part of such

Commissioner's review of the Plan of Reorganization following a

determination that such Plan of Reorganization is not prejudicial to

all Eligible Policyholders.

(c) The Plan of Reorganization will be filed with the New York

Superintendent who will determine whether the Plan of Reorganization is

fair and equitable to Eligible Policyholders from New York.

(d) The Plan of Reorganization will receive the concurrence of both

the Commissioner and the Superintendent before it is implemented.

(e) One or more independent Plan fiduciaries will have an

opportunity to determine whether to vote to approve the terms of the

Plan of Reorganization and will be solely responsible for all such

decisions after receiving full and complete disclosure.

(f) The proposed exemption will allow Eligible Policyholders that

are Plans to acquire Holding Company stock, cash or policy credits in

exchange for their membership interests in John Hancock and neither

John Hancock nor its affiliates will exercise any discretion or provide

``investment advice,'' as that term is defined in 29 CFR 2510.3-21(c)

with respect to such acquisition.

(g) No Eligible Policyholder will pay any brokerage commissions or

fees in connection with such Eligible Policyholder's receipt of Holding

Company stock or with respect to the implementation of the commission-

free sales and purchase programs.

(h) The Plan of Reorganization will not change premiums or reduce

policy benefits, values, guarantees or other policy obligations of John

Hancock to its policyholders and contractholders.

Notice to Interested Persons

John Hancock will provide notice of the proposed exemption to

Eligible Policyholders that are Plans within 14 days of the publication

of the notice of pendency in the Federal Register. Such notice will be

provided to interested persons by first class mail and will include a

copy of the notice of proposed exemption as published in the Federal

Register as well as a supplemental statement, as required pursuant to

29 CFR 2570.43(b)(2), which shall inform interested persons of their

right to comment on the proposed exemption. Comments with respect to

the notice of proposed exemption are due within 44 days of the

publication of this pendency notice in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,

telephone (202) 219-8881. (This is not a toll-free number.)

[[Page 57142]]

Bankers Trust Company (BT), Located in New York, NY

[Application No. D-10756]

Proposed Exemption

The Department is considering granting an exemption under the

authority of section 408(a) of the Act and section 4975(c)(2) of the

Code and in accordance with the procedures set forth in 29 CFR Part

2570, Subpart B (55 FR 32836, 32847, August 10, 1990).

Section I.--Covered Transactions

If the exemption is granted, the restrictions of sections

406(a)(1)(A) through (D) and 406(b)(1) and (2) of the Act and the

sanctions resulting from the application of section 4975 of the Code,

by reason of section 4975(c)(1)(A) through (E) of the Code, shall not

apply to: (1) The lending of securities to affiliates of BT, a wholly

owned subsidiary of Deutsche Bank AG (DB), which are: (i) Either banks,

supervised by the United States or by a State within the United States,

or broker-dealers registered under the Securities Exchange Act of 1934

(the 1934 Act); or (ii) certain foreign affiliates (the Foreign

Affiliates) of BT and DB which are broker-dealers or banks in

jurisdictions specified in this proposed exemption (collectively, the

Affiliated Borrowers), by employee benefit plans (the Client Plans),

including commingled investment funds holding Client Plan assets, for

which BT, DB, or either of their current or future affiliates or

successors acts as securities lending agent (or sub-agent) (the DB

Lending Agent); and (2) the receipt of compensation by the DB Lending

Agent in connection with these transactions, provided the general

conditions set forth below in Section II are met.

Section II.--General Conditions

(a) For each Client Plan, neither the DB Lending Agent nor an

Affiliated Borrower, nor an affiliate of either, has or exercises

discretionary authority or control with respect to the investment of

Client Plan assets involved in the transaction, or renders investment

advice (within the meaning of 29 CFR 2510.3-21(c)) with respect to

those assets.

(b) Any arrangement for a DB Lending Agent to lend Client Plan

securities to an Affiliated Borrower in either an agency or sub-agency

capacity is approved in advance by a Client Plan fiduciary who is

independent of the DB Lending Agent.14 In this regard, the

independent Client Plan fiduciary also approves the general terms of

the securities loan agreement (the Loan Agreement) between the Client

Plan and the Affiliated Borrowers, although the specific terms of the

Loan Agreement are negotiated and entered into by the DB Lending Agent

and the DB Lending Agent acts as a liaison between the lender and the

borrower to facilitate the lending transaction.

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\14\ The Department, herein, is not providing exemptive relief

for securities lending transactions engaged in by primary lending

agents, other than the DB Lending Agent, beyond that provided

pursuant to Prohibited Transaction Exemption (PTE) 81-6 (46 FR 7527,

January 23, 1981, as amended at 52 FR 18754, May 19, 1987) and PTE

82-63 (47 FR 14804, April 6, 1982).

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(c) The terms of each loan of securities by a Client Plan to the

Affiliated Borrowers is at least as favorable to such Client Plans as

those of a comparable arm's length transaction between unrelated

parties.

(d) A Client Plan may terminate the agency or sub-agency

arrangement at any time without penalty to such Client Plan on five

business days notice, whereupon the Affiliated Borrowers will deliver

securities identical to the borrowed securities (or the equivalent in

the event of reorganization, recapitalization or merger of the issuer

of the borrowed securities) to the Client Plan within: (1) The

customary delivery period for such securities; (2) five business days;

or (3) the time negotiated for such delivery of by the Client Plan and

the Affiliated Borrowers, whichever is less.

(e) The Client Plan receives from the Affiliated Borrower (either

by physical delivery or by book entry in a securities depository

located in the United States, wire transfer or similar means) by the

close of business on or before the day the loaned securities are

delivered to the Affiliated Borrower, collateral consisting of cash,

securities issued or guaranteed by the United States Government or its

agencies or instrumentalities, or irrevocable United States bank

letters of credit issued by a person other than the DB Lending Agent or

an affiliate thereof, or any combination thereof, or other collateral

permitted under PTE 81-6, as it may be amended or superseded.

(f) As of the close of business on the preceding business day, the

fair market value of the collateral initially equals at least 102

percent of the market value of the loaned securities and, if the market

value of the collateral falls below 100 percent, the applicable

Affiliated Borrower delivers additional collateral on the following day

such that the market value of the collateral again at least equal to

102 percent.

(g) Prior to entering into the lending program, the Affiliated

Borrower furnishes the DB Lending Agent its most recently available

audited and unaudited statements, which are, in turn, provided to a

Client Plan, as well as a representation by such Affiliated Borrower,

that as of each time it borrows securities, there has been no material

adverse change in its financial condition since the date of the most

recently-furnished statement that has been disclosed to such Client

Plan; provided, however, that in the event of a material adverse

change, the DB Lending Agent does not make any further loans to such

Affiliated Borrower unless an independent fiduciary of the Client Plan

is provided notice of any material adverse change and approves the loan

in view of the changed financial condition.

(h) In return for lending securities, the Client Plan either --

(1) Receives a reasonable fee, which is related to the value of the

borrowed securities and the duration of the loan; or

(2) Has the opportunity to derive compensation through the

investment of cash collateral. (Under such circumstances, the Client

Plan may pay a loan rebate or similar fee to an Affiliated Borrower, if

such fee is not greater than the fee the Client Plan would pay in a

comparable arm's length transaction with an unrelated party.)

(i) All procedures regarding the securities lending activities

conform to the applicable provisions of PTE 81-6 and PTE 82-63 as such

class exemptions may be amended or superseded as well as to applicable

securities laws of the United States or the jurisdiction in which the

Foreign Affiliate is domiciled, as appropriate.

(j) The DB Lending Agent or an affiliate which is domiciled in the

United States will indemnify and hold harmless each lending Client Plan

in the United States against any shortfall in the collateral, as set

forth in the applicable lending agreement (the Loan Agreement), plus

interest and any transaction costs incurred (including attorney's fees

of the Client Plan arising out of the default on the loans or the

failure to indemnify properly under this provision) which the Client

Plan may incur or suffer directly arising out of the lending of

securities of such Client Plan to such Affiliated Borrower, to the

extent permitted by law.15 In the event that an Affiliated

Borrower defaults on a loan, the DB Lending Agent will liquidate the

loan collateral to purchase identical securities for the Client Plan.

If the collateral is insufficient to

[[Page 57143]]

accomplish such purchase, the DB Lending Agent or the applicable

affiliate will indemnify the Client Plan for any shortfall in the

collateral, as set forth in the Loan Agreement, plus interest on such

amount and any transaction costs incurred (including attorney's fees of

the Client Plan arising out of the default on the loans or the failure

to indemnify properly under this provision). Alternatively, if such

identical securities are not available on the market, the DB Lending

Agent or the applicable affiliate will pay the Client Plan cash equal

to: (1) The market value of the borrowed securities as of the date they

should have been returned to the Client Plan, plus (2) all the accrued

financial benefits derived from the beneficial ownership of such loaned

securities as of such date, plus (3) interest from such date to the

date of payment.

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\15\ Where the law prohibits such indemnification by the DB

Lending Agent, the Affiliated Borrower will provide the identical

indemnification.

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(k) The Client Plan receives the equivalent of all distributions

made to holders of the borrowed securities during the term of the loan,

including, but not limited to, cash dividends, interest payments,

shares of stock as a result of stock splits and rights to purchase

additional securities, or other distributions.

(l) The DB Lending Agent provides to Client Plans, prior to any

Client Plan's approval of the lending of its securities to an

Affiliated Borrower, copies of the notice of proposed exemption (the

Notice) and the final exemption.

(m) Each Client Plan receives monthly reports with respect to its

securities lending transactions, including, but not limited to, the

information described in Representation 31 of the Notice, so that an

independent fiduciary of the Client Plan may monitor such transactions

with Affiliated Borrowers.

(n) Only Client Plans with total assets having an aggregate market

value of at least $50 million are permitted to lend securities to

Affiliated Borrowers; provided, however, that--

(1) In the case of two or more Client Plans which are maintained by

the same employer, controlled group of corporations or employee

organization (the Related Client Plans), whose assets are commingled

for investment purposes in a single master trust or any other entity

the assets of which are ``plan assets'' under 29 CFR 2510.3-101 (the

Plan Asset Regulation), which entity is engaged in securities lending

arrangements with a DB Lending Agent, the foregoing $50 million

requirement shall be deemed satisfied if such trust or other entity has

aggregate assets which are in excess of $50 million; provided that if

the fiduciary responsible for making the investment decision on behalf

of such master trust or other entity is not the employer or an

affiliate of the employer, such fiduciary has total assets under its

management and control, exclusive of the $50 million threshold amount

attributable to plan investment in the commingled entity, which are in

excess of $100 million.

(2) In the case of two or more Client Plans which are not

maintained by the same employer, controlled group of corporations or

employee organization (the Unrelated Client Plans), whose assets are

commingled for investment purposes in a group trust or any other form

of entity the assets of which are ``plan assets'' under the Plan Asset

Regulation, which entity is engaged in securities lending arrangements

with a DB Lending Agent, the foregoing $50 million requirement is

satisfied if such trust or other entity has aggregate assets which are

in excess of $50 million (excluding the assets of any Client Plan with

respect to which the fiduciary responsible for making the investment

decision on behalf of such group trust or other entity or any member of

the controlled group of corporations including such fiduciary is the

employer maintaining such Plan or an employee organization whose

members are covered by such Plan). However, the fiduciary responsible

for making the investment decision on behalf of such group trust or

other entity--

(i) Has full investment responsibility with respect to plan assets

invested therein; and

(ii) Has total assets under its management and control, exclusive

of the $50 million threshold amount attributable to plan investment in

the commingled entity, which are in excess of $100 million.

In addition, none of the entities described above are formed for the

sole purpose of making loans of securities.

(o) With respect to each successive two-week period, on average, at

least 50 percent or more of the outstanding dollar value of securities

loans negotiated on behalf of Client Plans will be to unrelated

borrowers.

(p) In addition to the above, all loans involving a Foreign

Affiliate have the following supplemental requirements:

(1) As applicable, such Foreign Affiliate is registered as a

broker-dealer or bank with--

(i) The Securities and Futures Authority (the SFA) or the Financial

Services Authority (the FSA) in the United Kingdom;

(ii) The Deutsche Bundesbank and/or the Federal Banking Supervisory

Authority, i.e., der Bundesaufsichsamt fuer das Kreditwesen (the BAK)

or the Bundesaufsichtsamt fur den Wertpapierhandel (the BAWe) in

Germany;

(iii) The Ministry of Finance (the MOF) and/or the Tokyo Stock

Exchange in Japan;

(iv) The Ontario Securities Commission (the OSC) and/or the

Investment Dealers Association (the IDA), or the Office of the

Superintendent of Financial Institutions (the OSFI) in Canada;

(v) The Swiss Federal Banking Commission in Switzerland; and

(vi) The Australian Prudential Regulation Authority (APRA) or the

Australian Securities and Investments Commission (ASIC), and/or the

Australian Stock Exchange Limited (ASEL) in Australia.

(2) Such broker-dealer or bank is in compliance with all applicable

provisions of Rule 15a-6 (17 CFR 240.15a-6) under the 1934 Act which

provides for foreign broker-dealers a limited exemption from United

States registration requirements;

(3) All collateral is maintained in United States dollars or

dollar-denominated securities or letters of credit (unless an

applicable exemption provides otherwise);

(4) All collateral is held in the United States (unless an

applicable exemption provides otherwise) and the situs of the

securities Loan Agreements are maintained in the United States under an

arrangement that complies with the indicia of ownership requirements

under section 404(b) of the Act and the regulations promulgated under

29 CFR 2550.404(b)-1; and

(5) Each Foreign Affiliate provides the DB Lending Agent a written

consent to service of process in the United States and to the

jurisdiction of the courts of the United States for any civil action or

proceeding brought in respect of the securities lending transaction,

which consent provides that process may be served on such borrower by

service on the DB Lending Agent.

(q) The DB Lending Agent and its affiliates maintain, or cause to

be maintained within the United States for a period of six years from

the date of such transaction, in a manner that is convenient and

accessible for audit and examination, such records as are necessary to

enable the persons described in paragraph (r)(1) to determine whether

the conditions of the exemption have been met, except that--

(1) A prohibited transaction will not be considered to have

occurred if, due to circumstances beyond the control of the DB Lending

Agent and/or its affiliates, the records are lost or

[[Page 57144]]

destroyed prior to the end of the six year period; and

(2) No party in interest other than the DB Lending Agent and/or its

affiliates shall be subject to the civil penalty that may be assessed

under section 502(i) of the Act, or to the taxes imposed by section

4975(a) and (b) of the Code, if the records are not maintained, or are

not available for examination as required below by paragraph (r)(1).

(r)(1) Except as provided in subparagraph (r)(2) of this paragraph

and notwithstanding any provisions of subsections (a)(2) and (b) of

section 504 of the Act, the records referred to in paragraph (q) are

unconditionally available at their customary location during normal

business hours by:

(i) Any duly authorized employee or representative of the

Department, the Internal Revenue Service or the Securities and Exchange

Commission (the SEC);

(ii) Any fiduciary of a participating Client Plan or any duly

authorized representative of such fiduciary;

(iii) Any contributing employer to any participating Client Plan or

any duly authorized employee representative of such employer; and (iv)

Any participant or beneficiary of any participating Client Plan, or any

duly authorized representative of such participant or beneficiary.

(r)(2) None of the persons described above in paragraphs

(r)(1)(ii)-(r)(1)(iv) of this paragraph (r)(1) are authorized to

examine the trade secrets of the DB Lending Agent or commercial or

financial information which is privileged or confidential.

III--Definitions

For purposes of this proposed exemption,

(a) The term ``affiliate'' means any entity now or in the future,

directly or indirectly controlling, controlled by or under common

control with BT, DB or their successors.

(b) The term ``Affiliated Borrower'' means an affiliate of BT or DB

that is a bank, as defined in section 202(a)(2) of the Investment

Advisers Act of 1940 (the Advisers Act), that is supervised by the

United States or a State, or a broker-dealer registered under the 1934

Act, or any Foreign Affiliate.

(c) The term ``Foreign Affiliate'' means an affiliate of BT or DB

that is a broker-dealer or bank that is supervised by: (1) The SFA or

the FSA in the United Kingdom; (2) the Deutsche Bundesbank and/or the

BAK, or the BAWe in Germany; (3) the MOF and/or the Tokyo Stock

Exchange in Japan; (4) the OSC, the IDA, and/or OSFI in Canada; (5) the

Swiss Federal Banking Commission in Switzerland; and (6) APRA, ASIC,

and/or ASEL in Australia.

EFFECTIVE DATE: If granted, this proposed exemption will be effective

as of April 9, 1999.

Summary of Facts and Representations

1. BT (also referred to herein as ``the Applicant'') is a New York

banking corporation and a leading commercial bank, whose parent,

Bankers Trust Corporation, is wholly owned by DB, a banking corporation

organized under the laws of the Federal Republic of Germany and the

largest banking institution in the world, based on assets.

2. The Applicant provides a wide variety of banking, fiduciary,

recordkeeping, custodial, brokerage and investment services to

corporations, institutions, governments, employee benefit plans,

governmental retirement plans and private investors. Its affiliates

actively engage in the borrowing of securities. All borrowings by U.S.

broker-dealer affiliates from pension plans conform to the Federal

Reserve Board's Regulation T. Since its merger with DB, the Applicant

has Foreign Affiliates worldwide that are engaged in the business of

trading securities. Among the Applicant's current affiliated banks and

broker-dealers are Foreign Affiliates based in--

(a) The United Kingdom (Affiliated Borrower/U.K.), which includes,

but is not be limited to, Bankers Trust International PLC and the

London Branch of Deutsche Bank;

(b) Japan (Affiliated Borrower/Japan), which includes, but is not

be limited to, Japan Bankers Trust Ltd. and the Tokyo Branch of

Deutsche Bank;

(c) Germany (Affiliated Borrower/Germany), which includes, but is

not limited to, Deutsche Bank;

(d) Australia (Affiliated Borrower/Australia), which includes, but

is not limited to, BT Australia Limited and the Sydney Branch of

Deutsche Bank;

(e) Canada (Affiliated Borrower/Canada), which includes, but is not

limited to, Deutsche Bank Canada and Deutsche Bank Securities Limited;

and

(f) Switzerland (Affiliated Borrower/Switzerland), which includes,

but is not limited to, Deutsche Bank (Suisse) S.A.

3. The Applicant and its affiliates actively engage in the

borrowing and lending of securities, with daily outstanding loan volume

averaging billions of dollars. The Affiliated Borrowers utilize

borrowed securities to satisfy their trading requirements or to re-lend

to other broker-dealers and others who need a particular security for

various periods of time.

4. The Applicant's U.S. affiliates are either U.S. registered

broker-dealers or banks supervised by the U.S. or a State. Affiliated

Borrower/U.K. is either authorized to conduct an investment business in

and from the United Kingdom as a broker-dealer regulated by the SFA or

as a deposit-taking institution or merchant bank regulated by the FSA.

Affiliated Borrower/Japan is authorized to conduct an investment

business in Japan as a broker-dealer or bank regulated by the MOF and/

or the Tokyo Stock Exchange. Affiliated Borrower/Switzerland is

authorized to conduct an investment business as a broker-dealer or bank

in Switzerland by the Swiss Federal Banking Commission. Affiliated

Borrower/Germany is authorized to conduct business in Germany as a bank

or broker-dealer by the Deutsche Bundesbank and/or the BAK, or the

BAWe.16 Affiliated Borrower/Australia is either authorized

to conduct an investment business in Australia as a bank or broker-

dealer by the APRA, the ASIC and/or the Australian Stock Exchange

Limited. Affiliated Borrower/Canada is authorized to conduct an

investment business in Canada as a bank or broker-dealer by the OSC

and/or the IDA or the OSFI.

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\16\ The BAWe is a German federal agency that enforces German

securities laws. Each German state has a state government agency

which regulates broker-dealers operating in that state. All broker-

dealers report directly to the appropriate state agency by filing,

within four months after the end of the fiscal year, audited

financial statements supplemented by quarterly earnings reports. In

addition, each German stock exchange admits broker-dealers to

membership and may revoke such membership. The stock exchanges limit

broker-dealer member transactions based on core capital or the

equivalent thereof, and additional security provided, based on their

exposure to risk from transactions on the exchange. Any change in

core capital having the effect of reducing the transaction limit

must be reported to the stock exchange immediately.

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5. Although not registered with the United States SEC as broker-

dealers, the Foreign Affiliates that are broker-dealers are subject to

the rules, regulations and membership requirements of their respective

governmental regulators and/or the self-regulatory organizations listed

above, relating to minimum capitalization, reporting requirements,

periodic examinations, client money and safe custody rules and books

and records requirements with respect to client accounts. These rules

and regulations share a common objective: the protection of the

investor by the regulation of the securities industry. While these

rules and regulations vary from country to country, they require each

firm which employs registered representatives or registered traders to

have a tangible net worth and be able to meet their obligations as they

may fall

[[Page 57145]]

due. In addition, these rules and regulations set forth comprehensive

financial resource and reporting/disclosure rules regarding capital

adequacy. Further, to demonstrate capital adequacy, the rules may

impose reporting/disclosure requirements on broker-dealers with respect

to risk management, internal controls, and transaction reporting and

recordkeeping requirements to the effect that required records must be

produced at the request of the respective regulators at any time.

Finally, these rules and regulations impose potential fines and

penalties on broker-dealers which establish a comprehensive

disciplinary system.

6. Similarly, the banks comprising the Foreign Affiliates are

subject to rules and regulations of their respective governmental

regulators. For example, Affiliated Borrower/U.K. banks are subject to

regulation in the United Kingdom by the FSA, the successor to the Bank

of England. The FSA issues licenses to banks in the United Kingdom,

issues directives to address violations by or irregularities involving

banks, requires information from a bank or its auditors regarding

supervisory matters and revokes bank licenses. In addition, the FSA has

established procedures for monitoring the activities of the DB Lending

Agent and its affiliates in the United Kingdom through various

regulatory standards. Among those standards are requirements for

adequate internal controls, oversight and administration. On a

recurring basis, the DB Lending Agent and its affiliates will be

required to provide the FSA with information regarding its activities

in the United Kingdom, profit and loss, balance sheet, large exposures,

foreign exchange exposures and country risk exposures. The Board of

Directors of the Federal Reserve System in the United States or the BAK

in Germany supervises the DB Lending Agent and its affiliates with

respect to capital adequacy.

In addition, the APRA, which has taken over the bank supervisory

duties of the Reserve Bank of Australia, licenses and regulates

Affiliated Borrower/Australia locally-incorporated banks. The APRA has

the power to issue and revoke bank licenses. In addition, the APRA may

issue directives to address violations by or irregularities involving

banks and it requires information from a bank or its auditors regarding

supervisory matters. The APRA has established procedures for monitoring

the activities of Affiliated Borrower/Australia banks in Australia

through various statutory and regulatory standards. Among those

standards are requirements for capital adequacy, internal controls,

oversight and administration. On a recurring basis, Affiliated

Borrower/Australia banks that are locally-incorporated will be required

to provide the APRA with information regarding its activities in

Australia, profit and loss, balance sheets and large exposures.

The APRA's licensing and supervision of Affiliated Borrower/

Australia foreign bank branches is similar to that of locally-

incorporated banks. While the APRA monitors credit risk concentrations

of foreign bank branches, endowed capital in Australia and capital-

based large risk exposure limits are the responsibility of the home

supervisor which is either the Board of Governors of the Federal

Reserve System in the United States or the BAK in Germany.

Further, banks comprising Affiliated Borrower/Canada are subject to

the rules of the OSFI, an entity that licenses and regulates Affiliated

Borrower/Canada banks established in Canada as deposit-taking

subsidiaries. The OSFI licenses banks, issues directives to address

violations by or irregularities involving the bank, requires

information from the bank or its auditors regarding supervisory matters

and revokes bank licenses.

In addition, the OSFI has established procedures for monitoring the

activities of Affiliated Borrower/Canada banks in Canada through

various statutory and regulatory standards. Among those standards are

requirements for capital adequacy, adequate internal controls,

oversight and administration. On a recurring basis, Affiliated

Borrower/Canada banks will be required to provide the OSFI with

information regarding its activities in Canada, profit and loss,

balance sheet, large exposures and foreign exchange exposures.

Where a foreign bank establishes a branch in Canada, the Minister

of Finance authorizes the establishment of the branch and the OSFI

licenses the bank branch to carry on business and may revoke the

license. The bank branch must have a minimum amount of unencumbered

assets in Canada equal to a percentage of branch liabilities and must

satisfy capital adequacy rules. Branches accepting deposits are subject

to a yearly audit by an external auditor and examination by the

OSFI.17

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\17\ For a description of the Bundesbank and BAK regime of

regulation applicable to banks comprising Affiliated Borrower/

Germany, refer to Representation 2 of the Summary of Facts and

Representations in the Notice (63 FR 53703, 53706, October 6, 1998)

for Salomon Smith Barney, Inc. Similarly, for descriptions of the

Swiss Federal Banking Commission and the MOF, which regulate both

banks and broker-dealers comprising Affiliated Borrower/Switzerland

and Affiliated Borrower/Japan, respectively, see Representations 3

and 4 of the Notice for the Union Bank of Switzerland and UBS

Securities, LLC (63 FR 15452, 15455, March 31, 1998).

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7. Aside from the protections afforded by the regulators in each

foreign jurisdiction, the Applicant represents that the Foreign

Affiliates will comply with all applicable provisions of Rule 15a-6 of

the 1934 Act. Rule 15a-6 provides foreign broker-dealers with a limited

exemption from SEC registration requirements and, as described below,

offers additional protections. Specifically, Paragraph (a)(4)(i) of

Rule 15a-6 provides an exemption from U.S. broker-dealer registration

for a foreign broker-dealer that effects transactions in securities

with or for, or induces or attempts to induce the purchase or sale of

any security by ``a registered broker or dealer, whether the registered

broker or dealer is acting as principal for its own account or as agent

for others, or a bank acting in a broker-dealer capacity as permitted

by U.S. law.'' 18 In engaging in borrowing activities, each

Foreign Affiliate, relying on the Paragraph (a)(4)(i) exemption will be

interacting solely with the Applicant, each of which is such a

``registered broker or dealer'' or ``bank,'' and will not be

interacting with the Applicant's underlying Client Plans.

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\18\ Section 3(a)(4) of the 1934 Act defines ``broker'' to mean

``any person engaged in the business of effecting transactions in

securities for the account of others, but it does not include a

bank. Section 3(a)(5) of the 1934 Act provides a similar exclusion

for ``banks'' in the definition of the term ``dealer.'' However,

section 3(a)(6) of the 1934 Act defines ``bank'' to mean a banking

institution organized under the laws of the United States or a State

of the United States. Further, Rule 15a-6(b)(3) provides that the

term ``foreign broker or dealer'' means ``any non-U.S. resident

person * * * whose securities activities, if conducted in the United

States, would be described by the definition of ``broker'' or

``dealer'' in sections 3(a)(4) or 3(a)(5) of the [1934] Act.''

Therefore, the test of whether an entity is a ``foreign broker'' or

``dealer'' is based on the nature of such foreign entity's

activities and, with certain exceptions, only banks that are

regulated by either the United States or a State of the United

States are excluded from the definition of the term ``broker'' or

``dealer.'' Thus, for purposes of this exemption request, the

Applicant is willing to represent that its Foreign Affiliates will

comply with the applicable provisions and relevant SEC

interpretations and amendments of Rule 15a-6.

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Paragraph (a)(3) of Rule 15a-6 provides an exemption from U.S.

broker-dealer registration for a foreign broker-dealer that induces or

attempts to induce the purchase or sale of any security (including

over-the-counter-equity and debt options) by a ``U.S. institutional

investor'' or a ``major U.S. institutional investor,'' provided that

the foreign broker-dealer, among other things, enters into these

transactions through a U.S. registered broker-dealer intermediary. The

term ``U.S.

[[Page 57146]]

institutional investor,'' as defined in Rule 15a-6(b)(7), includes an

employee benefit plan within the meaning of the Employee Retirement

Income Security Act of 1974 (the Act) if (a) the investment decision is

made by a plan fiduciary, as defined in section 3(21) of the Act, which

is either a bank, savings and loan association, insurance company or

registered investment adviser, or (b) the employee benefit plan has

total assets in excess of $5 million, or (c) the employee benefit plan

is a self-directed plan with investment decisions made solely by

persons that are ``accredited investors'' as defined in Rule 501(a)(1)

of Regulation D of the Securities Exchange Act of 1933, as

amended.19 The term ``major U.S. major institutional

investor'' is defined in Rule 15a-6(b)(4) as a person that is a U.S.

institutional investor that has total assets in excess of $100 million

or an investment adviser registered under Section 203 of the Advisers

Act that has total assets under management in excess of $100

million.20

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\19\ To the extent permitted by applicable U.S. securities law,

the Foreign Affiliates may rely on a U.S. bank or trust company to

perform this role.

\20\ See also SEC No-Action Letter issued to Cleary, Gottlieb,

Steen & Hamilton on April 9, 1997 (hereinafter, the April 9, No-

Action Letter), expanding the definition of the term ``major U.S.

institutional investor.''

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8. The Applicant represents that under Rule 15a-6, a foreign

broker-dealer that, in reliance on the Paragraph (a)(3) exemption,

induces or attempts to induce the purchase or sale of any security by a

U.S. institutional or major U.S. institutional investor must, among

other things--

(a) Consent to service of process for any civil action brought

by, or proceeding before, the SEC or any self-regulatory

organization;

(b) Provide the SEC (upon request or pursuant to agreements

reached between any foreign securities authority, including any

foreign government, and the SEC or the U.S. Government) with any

information or documents within the possession, custody or control

of the foreign broker-dealer, any testimony of any such foreign

associated persons, and any assistance in taking the evidence of

other persons, wherever located, that the SEC requests and that

relates to transactions effected pursuant to the Rule;

(c) Rely on the U.S. registered broker-dealer through which the

transactions with the U.S. institutional and major U.S.

institutional investors are effected to (among other things):

(1) Effect the transactions, other than negotiating their terms;

(2) Issue all required confirmations and statements;

(3) As between the foreign broker-dealer and the U.S. registered

broker-dealer, extend or arrange for the extension of credit in

connection with the transactions;

(4) Maintain required books and records relating to the

transactions, including those required by Rules 17a-3 (Records to be

Made by Certain Exchange Members) and 17a-4 (Records to be Preserved

by Certain Exchange Members, Brokers and Dealers) of the 1934 Act;

(5) Receive, deliver and safeguard funds and securities in

connection with the transactions on behalf of the U.S. institutional

investor or major U.S. institutional investor in compliance with

Rule 15c3-3 of the 1934 Act (Customer Protection--Reserves and

Custody of Securities); 21 and

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\21\ Under certain circumstances described in the April 9, 1997

No-Action Letter (e.g., clearance and settlement transactions),

there may be direct transfers of funds and securities between the

Client Plan and an Affiliated Borrower. The Applicant notes that in

such situations, the U.S. registered broker-dealer will not be

acting as a principal with respect to any duties it is required to

undertake pursuant to Rule 15a-6.

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(6) Participate in certain oral communications (e.g., telephone

calls) between the foreign associated person and the U.S.

institutional investor (not the major U.S. institutional investor),

and accompany the foreign associated person on certain visits with

both U.S. institutional and major institutional

investors.22

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\22\ Under certain circumstances, the foreign associated person

may have direct communications and contact with the U.S.

institutional investor. See April 9 SEC No-Action Letter.

9. As the DB Lending Agent, the Applicant provides securities

lending services on an agency basis to institutional clients. The DB

Lending Agent, pursuant to authorization from its client, will

negotiate the terms of loans with borrowers pursuant to a client-

approved form of Loan Agreement and will act as a liaison between the

lender (i.e., the Client Plan and its custodian) and the borrower to

facilitate the lending transaction. No loans of futures contracts will

be involved. The DB Lending Agent will have responsibility for

monitoring receipt of all required collateral and marking such

collateral to market daily so that adequate levels of collateral are

maintained. The DB Lending Agent also will monitor and evaluate on a

continuing basis the performance and creditworthiness of the borrowers.

The DB Lending Agent may or may not act as a custodian or directed

trustee with respect to the client's portfolio of securities being

loaned. The DB Lending Agent may be authorized, from time to time, by a

Client Plan to receive and hold pledged collateral and invest cash

collateral pursuant to guidelines established by such Client Plan. All

of the DB Lending Agent's procedures for lending securities will be

designed to comply with the applicable conditions of PTE 81-6 and PTE

82-63 (as such PTEs may be amended or superseded).23

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\23\ PTE 81-6 provides an exemption under certain conditions

from section 406(a)(1)(A) through (D) of the Act and the

corresponding provisions of section 4975(c) of the Code for the

lending of securities that are assets of an employee benefit plan to

certain broker-dealers or banks which are parties in interest. PTE

82-63 provides an exemption under specified conditions from section

406(b)(1) of the Act and section 4975(c)(1)(E) of the Code for the

payment of compensation to a plan fiduciary for services rendered in

connection with loans of plan assets that are securities.

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10. The DB Lending Agent may be retained occasionally by other

primary securities lending agents to provide securities lending

services in a sub-agent capacity with respect to portfolio securities

of clients of such primary lending agents. As securities lending sub-

agent, the DB Lending Agent's role under the lending transactions

(i.e., negotiating the terms of loans with borrowers pursuant to a

client-approved form of Loan Agreement and monitoring receipt of, and

marking to market, required collateral) parallels those under lending

transactions for which the DB Lending Agent acts as primary lending

agent on behalf of its clients.24

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\24\ As noted previously, the Department is not providing

exemptive relief herein for securities lending transactions that are

engaged in by primary lending agents, other than the DB Lending

Agent and its affiliates, beyond that provided by PTEs 81-6 and 82-

63.

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11. When a loan is collateralized with cash, the cash will be

invested for the benefit and at the risk of the Client Plan, and

resulting earnings (net of a rebate to the borrower) comprise the

compensation to the Client Plan in respect of such loan, which is split

between the Client Plan and the securities lending agent. Where

collateral consists of obligations other than cash, the borrower pays a

fee (loan premium), which is split between the Client Plan and the

securities lending agent.

12. Accordingly, the Applicant requests an administrative exemption

from the Department with respect to: (a) The lending of securities

owned by certain Client Plans for which the DB Lending Agent will serve

as securities lending agent or sub-agent to its Affiliated Borrowers

(both current and future) 25 following disclosure of their

affiliation with the DB Lending Agent; and (b) the receipt of

compensation by the DB Lending Agent in connection

[[Page 57147]]

with such transactions. For each Client Plan, neither the DB Lending

Agent nor any affiliate will have discretionary authority or control or

render investment advice over Client Plans' decisions concerning the

acquisition or disposition of securities available for loan. The DB

Lending Agent's discretion will be limited to activities such as

negotiating the terms of the securities loans with the Affiliated

Borrowers and (to the extent granted by the Client Plan fiduciary)

investing any cash collateral received in respect of the loans.

Because, under the proposed arrangement, the DB Lending Agent would

have discretion to lend Client Plan securities to an Affiliated

Borrower, and because the Affiliated Borrower is an affiliate of the DB

Lending Agent, the lending of securities to Affiliated Borrowers by a

Client Plan for which the DB Lending Agent serves as securities lending

agent (or sub-agent) may be outside the scope of relief provided by PTE

81-6 and PTE 82-63. Moreover, loans to the Foreign Affiliates would be

outside of the relief granted in PTE 81-6 (because it limits its relief

to banks and U.S. registered broker-dealers). Therefore, several

safeguards, described more fully below, are incorporated in the

application in order to ensure the protection of the Client Plan assets

involved in the transactions. In addition, the proposed lending program

will incorporate the conditions contained in PTE 81-6 and PTE 82-63 and

will be in compliance with all securities laws of the United States, to

the extent applicable.

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\25\ For the sake of simplicity, future references to the DB

Lending Agent's performance of services as securities lending agent

should be deemed to include its parallel performance as securities

lending sub-agent and references to Client Plans should be deemed to

refer to Plans for which the DB Lending Agent is acting as sub-agent

with respect to securities lending activities, unless otherwise

indicated specifically or by the context of the reference.

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13. Where a DB Lending Agent is the direct securities lending

agent, a fiduciary of a Client Plan which is independent of the DB

Lending Agent will sign a securities lending agency agreement with the

DB Lending Agent (the Agency Agreement) before the Client Plan

participates in a securities lending program. The Agency Agreement and

the explanatory material accompanying such agreement will, among other

things, describe the operation of the lending program, prescribe the

form of securities Loan Agreement to be entered into on behalf of the

Client Plan with borrowers, specify the securities which are available

to be lent, required margin and daily marking-to-market, and provide a

list of permissible borrowers, including the Affiliated Borrowers. The

Agency Agreement will also set forth the basis and rate for the DB

Lending Agent's compensation from the Client Plan for the performance

of securities lending services.

14. The Agency Agreement will contain provisions to the effect that

if the Affiliated Borrowers are designated by the Client Plan as

approved borrowers: (a) The Client Plan will acknowledge that the

Affiliated Borrowers are affiliates of the DB Lending Agent; and (b)

the DB Lending Agent will represent to the Client Plan that each and

every loan made to the Affiliated Borrowers on behalf of the Client

Plan will be at market rates which are no less favorable to the Client

Plan than a loan of such securities, made at the same time and under

the same circumstances, to an unaffiliated borrower.

15. When the DB Lending Agent is lending securities under a sub-

agency arrangement, the primary lending agent will enter into a

securities lending agency agreement (the Primary Lending Agreement)

with a fiduciary of a Client Plan who is independent of such primary

lending agent, the DB Lending Agent or an Affiliated Borrower, before

the Client Plan participates in the securities lending program. The

primary lending agent will be unaffiliated with the DB Lending Agent or

its affiliates. The DB Lending Agent will not enter into a sub-agent

arrangement unless the Primary Lending Agreement contains substantive

provisions akin to those in the Agency Agreement relating to the

description of the operation of the lending program, use of an approved

form of Loan Agreement, specification of securities which are available

to be lent, required margin and daily marking-to-market, and provision

of a list of approved borrowers (which will include Affiliated

Borrowers). The Primary Lending Agreement will specifically authorize

the primary lending agent to appoint sub-agents, to facilitate its

performance of securities lending agency functions. Where the DB

Lending Agent is to act as such a sub-agent, the Primary Lending

Agreement will expressly disclose that the DB Lending Agent is to so

act. The Primary Lending Agreement will also set forth the basis and

rate for the primary lending agent's compensation from the Client Plan

for the performance of securities lending services and will authorize

the primary lending agent to pay a portion of its fee, as the primary

lending agent determines in its sole discretion, to any sub-agent(s) it

retains pursuant to the authority granted under such agreement.

Pursuant to its authority to appoint sub-agents, the primary

lending agent will enter into a securities lending sub-agency agreement

(the Sub-Agency Agreement) with the DB Lending Agent under which the

primary lending agent will retain and authorize the DB Lending Agent as

sub-agent, to lend securities of the primary lending agent's Client

Plans, subject to the same terms and conditions as are specified in the

Primary Lending Agreement. Thus, for example, the form of Loan

Agreement will be the same as that approved by the Client Plan

fiduciary in the Primary Lending Agreement and the list of permissible

borrowers under the Sub-Agency Agreement (which will include the

Affiliated Borrowers) will be limited to those approved borrowers

listed as such under the Primary Lending Agreement.

The Applicant states that the Sub-Agency Agreement will contain

provisions which are in substance comparable to those described above,

which would appear in an Agency Agreement in situations where the DB

Lending Agent is the primary lending agent. In this regard, the DB

Lending Agent will make the same representation in the Sub-Agency

Agreement as described above in Representation 14 with respect to arm's

length dealings with the Affiliated Borrowers. The Sub-Agency Agreement

will also set forth the basis and rate for the DB Lending Agent's

compensation to be paid by the primary lending agent.26

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\26\ The agreement setting forth the respective rights and

obligations of the parties in a sub-agency arrangement may be a

tripartite agreement among the Primary Lending Agent, the Client

Plan and the DB Lending Agent.

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16. In all cases, the DB Lending Agent will maintain transactional

and market records sufficient to assure compliance with its

representation that all loans to the Affiliated Borrowers are

effectively at arm's length terms. Such records will be provided to the

appropriate Client Plan fiduciary in the manner and format agreed to

with the such Client Plan fiduciary, without charge to the Client Plan.

A Client Plan may terminate the Agency Agreement (or the Primary

Lending Agreement) at any time, without penalty to the Client Plan, on

five business days notice. In addition, the DB Lending Agent will make

and retain for six months, tape recordings evidencing all securities

loan transactions with Affiliated Borrowers.

17. The DB Lending Agent will negotiate the Loan Agreement with the

Affiliated Borrowers on behalf of Client Plans as it does with all

other borrowers. An independent fiduciary of the Client Plan will

approve the terms of the Loan Agreement. The Loan Agreement will

specify, among other things, the right of the Client Plan to terminate

a loan at any time and the Plan's rights in the event of any default by

an Affiliated Borrower. The Loan Agreement will explain the basis for

[[Page 57148]]

compensation to the Client Plan for lending securities to the

Affiliated Borrowers under each category of collateral. The Loan

Agreement also will contain a requirement that the Affiliated Borrowers

must pay all transfer fees and transfer taxes related to the security

loans.

18. Before authorizing the program permitting loans to Affiliated

Borrowers, a Client Plan will be furnished, upon request, the most

recently available audited and unaudited financial statements of the

Affiliated Borrowers. The Loan Agreement will contain a requirement

that the Affiliated Borrower must give prompt notice at the time of a

loan of any material adverse changes in its financial condition since

the date of the most recently furnished financial

statements.27 If any such changes have taken place, the DB

Lending Agent will not make any further loans unless an independent

fiduciary of the Client Plan has approved the loan in view of the

changed financial condition. Conversely, if the Affiliated Borrower

fails to provide notice of such a change in its financial condition,

such failure will trigger an event of default under the Loan Agreement.

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\27\ Like broker-dealers registered with the SEC, the Foreign

Affiliates are subject to capital adequacy provisions of their

respective regulatory entities. It is represented that such rules

require the Foreign Affiliates to maintain, at all times, financial

resources in excess of its financial resources requirement (the

Financial Resources Requirement). For this purpose, financial

resources include equity capital, approved subordinated debt and

retained earnings, less deductions for illiquid assets. The

Financial Resources Requirement includes capital requirements for

market risk, credit risk, foreign exchange risk and large exposures.

These regulatory authority rules require that if a firm's financial

resources fall below a certain percentage, the regulatory authority

must be notified so that it can examine the terms of the firm's

financial position and require an infusion of more capital, if

needed. In addition, a breach of the requirement to maintain

financial resources in excess of the Financial Resources Requirement

may lead to sanctions. If the breach is not promptly resolved, the

firm's activities may be restricted.

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19. As noted above, the agreement by the DB Lending Agent to

provide securities lending services, as agent, to a Client Plan will be

embodied in the Agency Agreement. The Client Plan and the DB Lending

Agent will agree to the arrangement under which the DB Lending Agent

will be compensated for its services as lending agent, including

services as custodian, where applicable, and manager of the cash

collateral received, where applicable, prior to the commencement of any

lending activity. The securities lending fee arrangement will be set

forth in the Agency Agreement and thereby will be subject to the prior

written approval of a fiduciary of the Client Plan who is independent

of the DB Lending Agent. Similarly, with respect to arrangements under

which the DB Lending Agent is acting as securities lending sub-agent,

the agreed upon fee arrangement of the primary lending agent will be

set forth in the Primary Lending Agreement or the tripartite agreement,

and such agreement will specifically authorize the primary lending

agent to pay a portion of such fee, as the primary lending agent and

sub-agent may agree, to any sub-agent, including the DB Lending Agent,

which is to provide securities lending services to the Client

Plan.28 The Client Plan will be provided with any reasonably

available information which is necessary for the Client Plan fiduciary

to make a determination whether to enter into or continue to

participate under the Agency Agreement (or the Primary Lending

Agreement or the tripartite agreement) and any other reasonably

available information which the Client Plan fiduciary may reasonably

request.

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\28\ The foregoing provisions describe arrangements comparable

to conditions (c) and (d) of PTE 82-63 which require that the

payment of compensation to a ``lending fiduciary'' is made under a

written instrument and is subject to prior written authorization of

an independent authorizing fiduciary. In the event that a commingled

investment fund will participate in the securities lending program,

the special rule applicable to such funds concerning the

authorization of the compensation arrangement set forth in condition

(f) of PTE 82-63 will be satisfied.

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20. Each time a Client Plan lends securities to an Affiliated

Borrower pursuant to the Loan Agreement, the DB Lending Agent will

reflect in its records the material terms of the loan, including the

securities to be loaned, the required level of collateral, and the fee

or rebate payable. The terms of the fee or rebate payable for each loan

will be at least as favorable to the Client Plan as those of a

comparable arm's length transaction between unrelated parties.

21. The Client Plan will be entitled to the equivalent of all

interest, dividends and distributions on the loaned securities during

the loan period. The Loan Agreement will provide that the Client Plan

may terminate any loan at any time without penalty to such Client Plan.

Upon a termination, the Affiliated Borrower will be contractually

obligated to return the loaned securities to the Client Plan within

five business days of notification (or such longer period of time

permitted pursuant to a class exemption). If the Affiliated Borrower

fails to return the securities within the designated time, the Client

Plan will have the right under the Loan Agreement to purchase

securities identical to the borrowed securities and apply the

collateral to payment of the purchase price and any other expenses of

the Client Plan associated with the sale and/or purchase.

22. The DB Lending Agent will establish each day a written schedule

of lending fees 29 and rebate rates 30 in order

to assure uniformity of treatment among borrowing brokers and to limit

the discretion the DB Lending Agent would have in negotiating

securities loans to the Affiliated Borrowers. Loans to all borrowers of

a given security on that day will be made at rates or lending fees on

the relevant daily schedules or at rates or lending fees which may be

more advantageous to the Client Plans. It is represented that in no

case will loans be made to Affiliated Borrowers at rates or lending

fees that are less advantageous to the Client Plans than those on the

schedule. The daily schedule of rebate rates will be based on the

current value of the Client Plan's reinvestment vehicles and on market

conditions, as reflected by demand for securities by borrowers other

than the Affiliated Borrowers. As with rebate rates, the daily schedule

of lending fees will also be based on market conditions, as reflected

by demand for securities by borrowers other than the Affiliated

Borrowers, and will generally track the rebate rates with respect to

the same security or class of security.

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\29\ The DB Lending Agent will adopt minimum daily lending fees

for non-cash collateral payable by the Affiliated Borrowers to the

DB Lending Agent on behalf of a Client Plan. The DB Lending Agent

will submit the method for determining such minimum daily lending

fees to an independent fiduciary of the Client Plan for approval

before initially lending any securities to the Affiliated Borrower

on behalf of such Client Plan.

\30\ The DB Lending Agent will adopt separate maximum daily

rebate rates with respect to securities loans collateralized with

cash collateral. Such rebate rates will be based upon an objective

methodology which takes into account several factors, including

potential demand for loaned securities, the applicable benchmark

cost of fund indices, and anticipated investment return on overnight

investments permitted by the Client Plan's independent fiduciary.

The DB Lending Agent will submit the method for determining such

maximum daily rebate rates to such fiduciary before initially

lending any securities to an Affiliated Borrower on behalf of the

Client Plan.

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23. The rebate rates (in respect of cash-collateralized loans made

by Client Plans) which are established will also take into account the

potential demand for loaned securities, the applicable benchmark cost

of funds indices (typically, Federal Funds, overnight repo rate or the

like) and anticipated investment return on overnight investments which

are permitted by the relevant Client Plan fiduciary. Further, the

lending fees (in respect of loans made by Client Plans collateralized

by other than cash) which are established

[[Page 57149]]

will be set daily to reflect conditions as influenced by potential

market demand

This text is long and has been trimmed here. Open the source document for the complete record.